“Forex” is the word, in common parlance, that means “foreign exchange”. So, what is the forex market? The most obvious answer is that it is a market where currencies are exchanged. Hence, the forex markets allow investors, like individuals and banks, to purchase, exchange, or sell any currencies. The forex market is the largest of all financial markets in the world. It comprises entities like banks, central banks, commercial institutions, investment management corporations, retail currency brokers, hedge funds and investors.
What is the Forex Market?
To understand the crux of forex markets, you should know that these markets are not controlled by single exchanges. The forex market is actually an international network of brokers and computers from all over the globe. The forex market is one in which one currency is exchanged for another to make profits. In the forex market, since you are dealing with currencies themselves, you do not need to open a Demat account.
The currency market or the forex market operates on two levels - the OTC or over-the-counter market and the interbank market. The over-the-counter markets of forex are those in which individuals trade via platforms online. In fact, forex trading online is tempting and leads many retail investors to enter these challenging markets. In terms of the interbank markets, these are traded by big banks which trade in currencies for the purpose of making adjustments to balance sheets, hedging, and trade on behalf of customers.
Key Aspects of Forex Markets
Now that you know the basic answer to “What is the currency market?”, you should know some vital aspects of currency markets in case you wish to enter these for investment. Note the following aspects of forex markets:
- A Profitable Market - For seasoned investors, forex markets are very profitable. Moreover, these are the most financially liquid markets, grossing in around 6.6 trillion in the amount of daily forex transactions as of April 2019 (Triennial Central Bank Survey of Foreign Exchange and Over-the-counter (OTC) Derivatives Markets in 2019 (bis.org). This is what makes forex trading popular and appealing.
- Easy Operating Hours - The markets of forex operate 24 hours per day and five days in a week. Starting Monday morning in Asian markets to the afternoon of Friday in the New York exchange, the forex markets do not shut overnight. Forex markets begin from Sunday (5 pm EST) and go on till Friday (4 pm EST), differing from equity markets which close at a point in any trading day.
- What is the forex market in terms of trading currencies? - Currencies are traded in pairs, one currency of the pair against the other, in forex markets. For instance, a currency pair could be USD/EUR. This means that the US dollar is traded against the euro.
- Currency Markets and their Operations - Currency markets operate as cash or spot markets and derivatives markets. Concerning derivatives markets, currencies may be traded as futures, options, forwards and currency swaps.
Balancing Risk and Reward
As forex markets are affected by different factors, like geopolitical conditions, they are open to high risk and extensive reward. They are also the most liquid markets in the world. However, they offer great portfolio diversification, and you don't have to open a Demat account to trade. While you explore currency trading, why not consider an upcoming IPO for investment as well?