The foreign exchange market (FXM) is an international marketplace that facilitates trading of national currencies. Forex traders speculate on fluctuating currency prices much as stock traders do when purchasing and selling stocks.
Companies trading internationally use the foreign exchange market to hedge against currency risk and investors and speculators also take advantage of it to make profits.
What is Forex?
The world forex market was previously dominated by institutional firms and large banks on behalf of clients; however, recent years have seen it becoming more accessible to individual traders and investors. It comprises three separate markets – spot, forwards and futures markets.
The forex market is an international financial marketplace open 24-hours-a-day and five and a half days a week that trades currencies from around the globe. Investors buy currencies they believe will increase in value while selling those they anticipate may decrease; traders often use leverage to increase investment sizes; all forex trades are executed using pairs known as currency pairs with one base currency and one quote currency per pair; there are seven major pairs and several minor ones and exotics.
How is Forex Traded?
As with the stock market, forex trading entails buying and selling currencies on the foreign exchange market. Major participants include central banks, retail brokers, multinational corporations and international organizations; demand is determined by macro economic forces such as interest rates, inflation levels, growth prospects of respective nations etc.
Every Forex trade involves buying one currency against another in pairs. For instance, traders might buy euros against dollars in hopes that the dollar strengthens against it over time and makes their investment worth more in future. The forex market operates 24/7/five and a half days every week worldwide and features high liquidity with leverage that increases both profits and losses for traders.
What is a Currency Pair?
Currency pairs refers to two national currencies that have their values quoted against one another and traded on the foreign exchange market, which operates 24 hours a day, five days a week.
The first currency listed is known as the base currency while the second, known as quote currency, serves as the quote currency. Each pair also displays an exchange rate which displays how many units of quote currency must be purchased to acquire one unit of base currency.
Investors trade currency pairs for various reasons. Companies who operate internationally may use them as an effective way of managing foreign currency exposure more cost effectively. Other influences that could potentially alter currency prices include changes to overnight interest rates set by central banks, economic data or politics.
What is a Forward Contract?
Forward contracts (or “forwards”) are an invaluable hedging tool for corporations and institutions, similar to futures contracts in that they enable traders to lock in a price for an asset at some future date. Forwards may be used as protection against commodity prices, exchange rates or interest rate movements; unlike futures contracts which trade on regulated exchanges. Forwards agreements can be traded over-the-counter unregulated.
Market volatility can have a devastating effect on international payments costs, yet with expert guidance and tools such as forward contracts your business can reduce this risk significantly.
What is a Spot Transaction?
Spot transactions take the guesswork out of currency exchange and make a quick and seamless transfer possible. At OFX, a spot transaction refers to any single transfer made at the current spot rate that’s confirmed immediately upon completion.
Spot markets are financial marketplaces where financial instruments and commodities can be traded instantly for immediate delivery and cash consideration, also referred to as physical or cash markets due to direct physical exchange of assets.
Forward and futures markets create contracts for trades today with delivery expected in the future, while spot markets can be found online or organized market exchanges; buyers and sellers must agree on a price for an asset before engaging in transactions.