World-famous, the foreign exchange market today remains the most popular market. Also called “forex” in a more technical language, the foreign exchange market is the place of choice for investors The only difference which makes its specificity is that it is the currency that is exchanged there permanently. This market functions differently from others and obeys a well-defined functioning and system.
Functioning of the foreign exchange market
A foreign exchange market is a market where there are main exchangers including sellers and buyers of currencies. These are the actors who make the market work and give it all its importance.
Sellers and buyers exchange currencies according to a variable exchange rate depending on the world economy but also on the overall trading situation. So a person sells a currency to another person.
The specificity of the foreign exchange market is that it is only one single entity. That is, the world has only one forex market. This gives it an international dimension.
The different stakeholders
Stakeholders or players in the foreign exchange market can be:
- Companies that go through the market for international trade or larger investments in order to increase the firm but also to make significant gains.
- Some financial institutions to manage their investment, mainly banks.
- Individuals or households: changes are useful to them in everyday life.
These different actors can be sellers as well as actors. They constitute the supply and demand of currencies.
Exchanges between actors
Trading currencies necessarily requires access to the market. On the foreign exchange market, players do not go through any intermediary. Sellers and buyers trade directly with each other.
Whether for operations or actual transactions. An especially concrete case with financial organizations. For individuals and businesses, they go through their banks first. These are the ones who represent their accounts and trade in their places on the currency market.
Foreign exchange transactions
Foreign exchange transactions are the most common operations, as are trading spreads for example. There are two types of foreign exchange transactions. The first is the cash transaction.
It is also called spot. The principle is to buy one currency against the sale of another currency. This takes into account the exchange rate on the market. The second operation is the forward one.
Its operation is similar to the first operation. The difference is that the forward transaction takes into account the quantity and the date which is fixed on the day of the transaction. The price to be taken into account will thus be that of the day of the agreement.
But we can also find currency swaps (mixture of the two operations) and derivative products (options available on Forex).
Being continuously up to date on the exchange rate and the currencies thus allows the actors to realize gains or losses by speculating the operations. Thus speculative transactions are becoming common in the market.
An electronic market
The currency market is not a physical market. We cannot grant it clean premises. It is a market carried out electronically through banks. Thus, any place can thus provide access to the foreign exchange market.
This circulates an average of $ 2 trillion per day. Some of the most common currency pairs are Euro / Dollar, Dollar / Yen, and Pound Sterling / Dollar. Transactions simultaneously combine the action of buying and selling.
Note that the exchange rate is never static, even over the course of a day. The currencies exchanged are always based on this variable rate.
The main role of the foreign exchange market
Its main role is to determine the value of a currency based on those of other currencies. In a way, the foreign exchange market is the barometer of the world economy.
The place of a currency and its value in relation to others testify to the economic health of the country. People often mix up stocks and currencies. To buy a currency is to make a constant comparison with another.
This in the hope of making gains in relation to the purchases that we have made. This is not the case with stocks in a certain way.