Countless numbers of people make use of the foreign exchange market every day in order to exchange global currencies. This market has been important for years and despite declines here and there, it continues to grow. If you’re thinking of trading in the market, let’s first learn a little bit about what it is and how it works.
What Is The Foreign Exchange Market?
The foreign exchange market is a global network where currencies are bought and sold. Instead of operating out of a physical location, it’s online all day, every day, setting the exchange rates for currencies. As a participant, you will be able to buy or sell currencies. At the same time, you might want to exchange or speculate on currencies, too.
The actual foreign exchange market is made up of banks, companies, central banks, investment firms, hedge funds, brokers and investors. This market, otherwise called the forex market, is the largest financial market in the world.
Tiers of the Market
The forex market is split up into two tiers: there’s the first tier, known as the Interbank Market, where the biggest banks exchange currencies. Only a few members are a part of this one, but the trades are huge, allowing it to dictate currency values.
The second tier is the over-the-counter market, otherwise known as the OTC. You as an individual would be trading here, since there are many companies that now trade online.
Characteristics of the Market
One of the things that sets the forex market apart is that there’s a high amount of liquidity. This is due to the fact that there’s such a large trading volume, covering the largest asset class globally. It’s also open all the time, barring weekends and is the most convenient for those of you in school or in work during regular hours.
With the high amount of leverage guaranteed to traders and investors, you’re able to exchange profits and gains by increasing investor control over currencies. There’s a reason the forex market is the biggest one in the world.
How It Works
The forex market is just like any other market – currencies are bought and sold at the current rate, so if you need Japanese yen, for instance, you’re able to exchange it here at a certain exchange rate. The exchange rate is the price of a currency with respect to another one; due to the domination of the US in financial markets, usually this is in US dollars.
The rate will be determined by supply and demand, but there’s also an exchange rate known as the floating exchange rate. This type of rate is where there are various market factors involved, including interest rates, economic conditions, people’s sentiments about the local or international situation and people’s thoughts about the future. After you finalize the deal, though, it will be called a spot deal and you’ll make your settlement in cash. Usually, it takes two days to settle.
How It’s Growing
Over the years, the global exchange market has been growing, with many more trillions being traded and much more turnover growth. The composition of currency has also changed, with the Japanese yen suddenly experiencing an increase in trading activity. The euro has declined in the same period, while the Mexican peso and Chinese renminbi have also risen in importance.
The US dollar still remains dominant, although since 2013, it has decreased in value somewhat in comparison to what it was previously. This is only slightly, though, but trading has decreased in the same time. However, the market is still growing and with multiple currencies becoming more important, it will continue to be an important part of global trade in the coming years.
The foreign exchange market has been growing throughout the years and will continue to do so in the years to come. It’s a great place to trade all day, every day, with countless people watching as it grows and as different currencies rise significantly. If you’re thinking of trading and traveling, it’s a great place to get started.