Forex Trading
Forex trading [FX trading] involves the buying and selling of currencies of various different nations. In this type of trade, currencies are exchanged on a continuous basis in the forex market that covers the globe. People have several opportunities for profit-making in forex trading when value of one currency fluctuates against that of another.
Forex trading is quite popular due to several factors like the leverage available, the high liquidity 24 hours a day and the very low dealing costs.
Evidently many commercial organizations participate in such trades purely due to the currency exposures created through their import and export activities, but the major part of the turnover is accounted for by financial institutions. Investing in foreign exchange remains mainly the domain of the big professional players in the market, such as funds, banks and brokers. Nonetheless, any investor having the necessary knowledge of the market's functions can also benefit from the advantages stated above.
People conduct Forex Trade to:
- To Make direct foreign investments
- Earn profits and make money from short-term fluctuations in the values of a currency pair
- Control their existing positions in the market
- Fulfill their import and export needs
In forex market, there does not exist any centralized exchange, trading is conducted either through the Electronic Broking System (EBS) or online through the Internet. Online forex trading is very popular among individual investors. High leverage, flexibility and liquidity are the three main factors that attract people towards forex trading.
How is Forex Trading Conducted?
Similar to other transactions, forex trading involves sellers, buyers, and intermediaries. While buyers and sellers in this market could be banks, investment management firms, commercial companies, hedge funds and retail investors, the intermediaries are the brokers. Forex brokers act as market makers and place bid and ask prices for a currency pair on behalf of the buyer or the seller.
Buyers make money by buying a currency at a lower price and selling it later at a higher price. All transactions by individual traders in case of the forex market occur through brokers. However, the majority of the forex trade is conducted between banks.
Benefits of Forex Trading
- It is done in an extremely liquid market. Hence, one is unlikely to get stuck in a trade. He/she can open and close any position according to his/her desired level.
- Traders can make profits in both rising and falling markets. One can take a short position (selling the currency pair and purchasing it back at a lower price) or long position (purchasing the currency pair and selling it later at a higher price).
- Gives traders an option to trade in small lots. This allows a beginner or a novice trader to begin with small amount of capital and limits the risks.
- Traders don't need to pay commissions to brokers. The transaction cost is built into the currency price and is known as spread, which is actually the difference between the buying and selling price at a given time.
Drawbacks of Forex Trading
Forex trading could lead to huge losses incase the trader is a novice. The lack of prompt action can also lead to significant losses.
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