Foreign exchange popularly known as forex is the conversion of one country’s currency into another. In a free economy, a country’s currency is valued according to the laws of supply and demand. In other words, a currency’s value can be pegged to another country’s currency, such as the U.S. dollar, or even to a basket of currencies. A country’s currency value may also be set by the country’s government.
The forex market is not dominated by a single market exchange, but a global network of computers and brokers from around the world. Forex brokers act as market makers as well and may post bid and ask prices for a currency pair that differs from the most competitive bid in the market.
The forex market is made up of two levels—the interbank market and the over-the-counter (OTC) market. The interbank market is where large banks trade currencies for purposes such as hedging, balance sheet adjustments, and on behalf of clients. The OTC market, on the other hand, is where individuals trade through online platforms and brokers.
Average daily value of the forex market…
According to the Bank for International Settlements triennial report of 2016, the foreign exchange market cap averaged $5.1 trillion per day. This figure is down from the previous report in 2013 of $5.4 trillion. There are only a few countries that account for the majority of forex trading turnover.
Factors affecting currency value
The value of any particular currency is determined by market forces based on trade, investment, tourism, ease of business in the country and government policies. Every time a tourist visits a country, for example, they must pay for goods and services using the currency of the host country. Therefore, a tourist must exchange the currency of his or her home country for the local currency. Currency exchange of this kind is one of the demand factors for a particular currency.
Type of Forex Markets
Three are three key types of forex markets: spot, forward, and futures.
Spot Forex Market
The spot market is the immediate exchange of currency between buyers and sellers at the current exchange rate. The spot market makes up much of the currency trading.
The key participants in the spot market include commercial, investment, and central banks, as well as dealers, brokers, and speculators. Large commercial and investment banks make up a major portion of spot trades, trading not only for themselves but also for their customers.
Forward Forex Market
In the forward markets, both parties agree to trade a currency for a set price and quantity at some future date. No money exchanges hands when the deal is made. The parties can be companies, individuals, governments, and the likes. Forward markets are useful for hedging.
Futures Forex Market
Future markets are similar to forward markets in terms of basic function. However, the big difference is that future markets use centralized exchanges. Thanks to centralized exchanges, there are no counter-party risks for either party. This helps ensure future markets are highly liquid, especially compared to forward markets.
A forex broker is a financial services company that provides traders access to a platform for buying and selling foreign currencies or at times an intermediary between buyers and sellers.
Companies that offers forex brokerage services
- Plus500 – Overall winner for beginners and ease of use
- IG – Excellent education, most trusted
- eToro – Best trading platform for copy trading
- AvaTrade – Quality educational resources
- CMC Markets – Best web trading platform, excellent education
- XTB – Best customer service, great education
- OANDA – Quality research, user-friendly platform
- XM TRADES
- OCTA FX
- IQ OPTION
- INSTA FOREX
- HF FOREX
DISCLAIMER: The financial markets is a really complex one Youngprenuers is not responsible for any loss incured from the use of this material as all contents here are for educative purposes only..