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Foreign Exchange Basics


In any given situation, say job hunting, it is always a must to know what you got yourself into. Similarly, when you think of investing your money, you do not just impulsively invest it into something. You have to know the basics: what is it, how it works etc.

Similarly, if you are thinking of being a foreign exchange market participant, you have to have proper understanding of what you will be dealing with.

What makes the foreign exchange market unique?  The foreign exchange market is often regarded as truly unique and close to being an ideal market. No other market is comparable to the foreign exchange market because of these factors:

  • The volume of exchange. The foreign exchange market is a growing and the largest financial market in the world. Therefore it is hard to imagine how much assets are being exchanged daily.
  • The ability of the assets to be converted easily through buying and selling without worrying about fluctuations in price and loss of value. This is called the market liquidity.
    The extreme liquidity of the foreign exchange market enables it to meet financial obligations more quickly and easily because of the number of buyers and sellers who are ready to trade.
    You can have the option to liquidate a less liquid (meaning an asset which is hard to sell because of uncertainties regarding its value) to a more liquid asset (an asset which is readily salable because of its high value) because of the large number of participants which are always willing to trade.
  • Large number of traders and participants in the exchange of assets. The foreign exchange market involves trading between large banks in the world, including the central bank, governments, corporations, big name institution and currency speculators.
  • The foreign exchange market is operational 24 hours a day except on weekends. This is to accommodate the large number of the market participants and the amount of assets being traded daily.
  • This market is not only limited to Americans. This is, in fact dispersed worldwide. Any country with a currency and an asset (which he is willing to trade or sell) can take part in this ever growing market.
  • Because of the large trading volumes and large number of market participants involved in the foreign exchange market, even a low margin of profit can be really high. This is much more advantageous than that of another market which offers a higher profit but a fixed income.
  • Leverage is the term used in finance (thus in the foreign exchange market) which refers to the use of borrowed funds (example is a loan) in order to enhance the potential of greater return to the investor.

Competitive Foreign Exchange Market

Similarly, the above characteristics of the foreign exchange market also describe a perfectly competitive market. Unlike other markets, whether small scale or large scale markets, nothing can compare to this perfectly competitive market.

Perfect competition, in microeconomics and neoclassical economics, refers to a kind of market in which no one has the power over the market. In a perfectly competitive market, a product’s price cannot be influenced by a certain person or a certain firm. Generally, this is characterized as a market with:

  • Many sellers and buyers, so that anyone can sell and buy with a breeze.
  • A narrow focus in that it only deals with eight currencies - unlike the stock market which involves choosing a bunch of stock.
  • Perfectly informed buyers and sellers. Because we are talking about a relatively less number of stocks for a very large scale market, the people involved here are very much knowledgeable of everything they need to know about the asset.
  • Extreme profitability in the foreign exchange market.  You do not have to be a millionaire to participate. You can start with a very little capital in the Forex biz!

Why Foreign Exchange Market?

Why should you invest your hard-earned money in the foreign exchange market, anyway?  This is a very good question. One good thing about the foreign exchange market is that any movement or fluctuations is a good opportunity for exchange.

There are a whole lot of place for speculations on rising or falling stocks which is very unlikely of the stock market in which speculations on the value of a currency may cause your downfall. This, of course, involves a lot of risks so you may want to consult professionals or even regular people who are aware of the world’s current issues.

Do not forget to study on your own so that you will be properly equipped with the basics of Forex trading. Foreign Exchange Training are very much available online thus this will give you much time to think about what you really intend to do with your money.

With the right knowledge, the preparedness to accept risks and uncertainties, and the ability to assess things beforehand to guide you in your speculation, there is a good chance that you will be successful in this business. Nothing can equate to hard work and perseverance when it comes to doing business.

Read Next: Forex Trading Challenges




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