How Foreign Exchange Market Works, Offers Platform for Buying and Selling Currencies

By  //  November 25, 2018

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Apart from facilitating currency conversion for investments and international trades the foreign exchange market offers a platform for buying and selling currencies.

Apart from facilitating currency conversion for investments and international trades the foreign exchange market offers a platform for buying and selling currencies.

Financial institutions, banks, individuals and corporations exchange approximately $ 5 trillion in a day; making the foreign exchange market the largest market in the globe. The devolution of the market has brought in a great number of investors and traders.

What makes the Forex dominate is the fact that investors are not held to strict regulations. The market is operational 24/7; allowing participation any time of the day. This is unlike other markets such as the stock market which have specific operating hours.

The Forex chain

Big and small financiers are able to trade currency against each other. The currencies are diagrammed on different exchange rates making it easy for the foreign exchange market to compete with the specific commodity markets and the stock market. The Forex in some occasions gives no deposit bonus forex to attract and retain more traders. More traders denote more buying and selling which eventually intensifies turnover.

At the foreign market exchange, the currencies are traded in pairs. Therefore, you can only trade one currency against the other and trade is specifically done between two parties. At the lowest level trade is done between individuals while at the highest level it is done between banks, big businesses, hedge funds or pensions funds.

Currency value

Currency value is affected by the huge amounts of currency being bought and sold. To master the trends, experts make assumptions of what is about to ensue by considering different areas. These areas include inflation reports, unemployment reports, oil prices, central bank rate decisions and gross domestic product numbers.

The areas can be classified into economic releases that give information on interest rates and news on currencies. Other things that affect currency value are elections, economic agreements geopolitics, terrorist threats. Which are commonly known as changing risk environment.

Determinants of exchange rates

Exchange rates are determined by how the players at the peak of the pyramid behave. The big shots are big businesses, hedge funds, banks and pensions funds who have amassed big shares of capital. These players have the gear to buy currencies in bulk so as to grow their portfolios and avoid losing money in the market by making more money.

They receive the best rates which in return gives them an upper hand in the interest rates. The individual rover who is the smallest player in the chain, thus receives the poorest rates in the market and loses a substantial value of the money by getting less.

You may be asking why the players in the foreign exchange market do not get the same rates as the banks. It is quite simple; the banks being players in the field also need to make a profit.

They buy currencies at a lower price and sell at a higher price. Why is this the case? Banks need to cover their operational cost and also make profit. The only way a small investor can avoid low exchange rates is by skipping all the intermediaries and exchanging money directly with other small personalities.

The rules are simple buy and sell as much currencies as you can. The Forex is a free market and you can opt out anytime you want. The rates often shift, the best time to trade is when rates are stable. That is the time the risk of losing is low.

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