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Foreign Currency Trading

Foreign Currency Trading

25.03.2021

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Why Trade Foreign Currency?

It all depends on the situation. Some go to the forex market to exchange currencies to buy goods, services, or securities such as foreign exchange stocks or bonds.

Forex is also an opportunity to invest profitably. Foreign currency is bought because it provides a higher percentage of income than the base currency.

The forex market can be used to profit from price fluctuations. We are talking about selling the base currency and buying another in the hope that after a while its price will rise.

The largest buyers and sellers in the forex market are banks. Although banks can trade on their own behalf, they mostly accompany their clients’ transactions.

Despite the fact that hundreds of banks and brokers are engaged in currency trading, the market is dominated by the “big five”: Citigroup, Deutsche Bank, Barclays, JP Morgan, and UBS. In total, in 2015, their operations accounted for more than half of the global market turnover.

Terminology

Forex is an over-the-counter (OTC) market. This means that trading does not take place on the exchange, but through counterparties directly or through the trading platform.

Each currency has a code, for example, US dollar – USD, Euro – EUR, Japanese yen – JPY. The International Organization for Standardization ISO lists 268 different currencies.

Most of the transactions in the forex market are “spot”. This means that the conclusion of transactions and the transfer of funds to bank accounts is almost instantaneous.

However, there are also forward foreign exchange contracts. They imply that you agree in advance with the bank or broker on the rate of buying or selling currency in the future.

How to Trade Forex?

The bank or broker gives you access to their online trading platform. You link it to your bank account and trade. There are many specialized platforms through which individuals can access forex trading.

Foreign exchange markets and foreign exchange transactions

The concept of the world foreign exchange market. Foreign exchange market structure and its participants

The development of various forms of economic ties between countries forms the supply and demand of different national currencies. Such links are world trade, movement of factors of production, tourism, business travel, etc.

The world foreign exchange market is a set of relations arising between commercial banks, non-bank financial institutions, firms, individuals regarding international transactions with foreign currencies. The world currency market exists wherever it becomes necessary to sell or buy one currency for another. The role of goods and money in the foreign exchange market is played by national currencies or a set of currencies. The object of the market can be the foreign currency in cash or any financial claim expressed in foreign currency.

The subjects of the global foreign exchange market are banks, currency exchanges, corporations, mutual and pension funds, brokerage firms, and other financial institutions located in different countries. Market entities are interconnected by a complex network of modern communication systems through which currencies are traded.

The world foreign exchange market took shape with the growth of national economies and world trade. Gradually, the world’s financial and trade centers – London, Paris, New York, and later Tokyo, were promoted to leading positions in the foreign exchange market.

Frankfurt is Main, Hong Kong, Singapore. National financial centers with a number of advantages have come forward to play the role of world financial centers:

  • these are financial centers of the most developed countries of the world;
  • the domestic foreign exchange and financial market in these countries was the most developed;
  • these centers had extensive and effective international links and communications.

Currency and currency values ​​were traded mainly on currency exchanges. The exchanges were interconnected by communication systems and, in fact, trading took place around the clock: the closing of the Tokyo exchange almost coincided with the opening of the New York exchange. Exchange rates were formed in each financial center relatively independently.

In addition to the exchange currency market, the over-the-counter market was actively developing. The over-the-counter foreign exchange market is an interbank market. However, its development was constrained by the presence of currency restrictions and the limited convertibility of currencies of most countries. The Bretton Woods Agreements discouraged speculative currency trading. The international currency market began to acquire a modern look from the late 70s of the XX century, after the collapse of the Bretton Woods monetary system and the transition to a system of floating exchange rates.

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