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Foreign Currency Market: What is it & How it Works

Foreign Currency Market: What is it & How it Works

Foreign currency market operates on similar lines as the regular stock exchange market. But, instead of stocks, commodities and bonds, it allows investors to buy and sell foreign currencies. It is popularly called forex trading. Did you know that the global forex trading market is $1.93 quadrillion and $5.3 trillion dollars are traded every day?

There are multiple layers of entities involved in forex trading. Commercial banks, central banks, brokers, multinational corporations, individual investors and speculators form the foreign currency trading ecosystem. These stakeholders stay connected in spite of different time zones and operate through a highly professional, sophisticated interbank network system.

The currency prices are determined by a number of factors such as socio-economic-political conditions, inflation, interest rates, international trade, etc. The government of a country may intervene and participate in the foreign currency exchange market if there is a need to influence the value of its currency. There is no single factor that can impact the prices for a longer period of time.

Types of Foreign Currency Market

There are three types of markets:

  • Spot Market: The currency transactions in the spot market happen with instant payments at the exchange rate at that point in time.
  • Futures Market: The currency transactions in futures market involved payment and delivery in future, but a predetermined exchange rate. The terms of forex trading deals are fixed, and there is no room for negotiation.
  • Forward Market: Forward market is similar to the futures market; the only difference that the terms of forex trading deals are open for negotiation.

Advantages of Forex Trading

  • It is a new investment avenue for investors, especially for those who want to go beyond traditional investments or have exhausted the options in their investment kitty.
  • It gives an opportunity to earn higher returns while keeping the risk capital minimum.
  • You can trade using leverage, meaning that you can trade more money than what you have in your forex account.
  • The forex exchange market is highly transparent in its operations because it involves international dynamics and players.
  • The transaction costs are low.
  • The liquidity is high – investment can be quickly converted into cash.
  • It operates for 24 hours for five days a week due to time zone differences.

Features of Foreign Currency Market in India

Forex trading is still a new investment concept in India, albeit it is beginning to grab the attention of many investors. Let’s take a look at its key characteristics:

  • Yes, forex trading is legal in India. However, you can trade them only with Indian forex brokers registered with SEBI.
  • Currencies are traded on BSE, NSE, USE and MCX-SX platforms.
  • The forex trading time is from 9:00 am to 5:00 pm.
  • The base trading currency is INR.
  • RBI, the central bank of India, allows trading only in four currency pairs: – USDINR, GBPINR, EURINR and JPYINR.

Tips for Forex Trading

It should be noted that forex trading is not suitable for every investor because of its complexity. Here are some trading tips to help you sail through the foreign currency market:

  • Familiarize yourself with the terminology and workings of the forex market.
  • Monitor the international market trends and performance of your investment closely every day.
  • Since the market is open for 24 hours, five days a week, find out which time suits you best for trading.

While there is no issue with trading yourself in the foreign currency exchange market, it is advisable to seek services of a reputed and experienced forex broker. The broker can handle all your investments on your behalf and take off the burden off your shoulders from day-to-day monitoring.


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Prince Saini

An #entrepreneur who's passionate about solving real world problems and #inspiring people to achieve the next POSSIBLE in their lives.



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