Forex market is often used in our day-to-day life and conjures up the imagination of a vast building somewhere. However, that is not the case. The Forex market or the currency market or the Foreign Exchange market is a decentralized global market or over the counter market to trade currencies. The forex market determines the foreign exchange rates for every currency in the world. It includes aspects of exchanging, buying, and selling of currencies at determined or current prices. It is the largest market in the world in terms of the trading volume.
Large international banks are the prominent participants in the forex markets. Massive financial centers worldwide act as trading anchors amongst a wide range of multiple buyers and sellers 24/7. Currencies are always traded in pairs, and hence the forex market does not set a currency’s fixed value but determines its relative importance. The forex markets work through several financial institutions and operate on various levels and assist in international trade and investments by facilitating currency conversion. The forex market is unique in most of its aspects.
Here a list of characteristic features that make the foreign exchange market stand out from the rest:
- Absence of physical existence: Unlike the bond and the stock markets, the foreign exchange market does not have a physical presence. There is no physical place where the dealers are seated and facilitate currency conversion. The foreign exchange market consists of money changers globally. The forex market is connected via information. Initially, information was transmitted manually but has now changed into the electronic transmission of data. The currency market constitutes an interconnected network of buyers and sellers all over the world.
- Liquidity: The Forex market is considered to be one of most liquid market in the world. Currency spot trading is one of the most popular instruments of foreign exchange around the world. Liquidity has significant benefits, one of them being the absence of manipulation of the market. Stocks and futures market can be easily pushed up and down through manipulation by commercials, brokers, specialists, market makers, and locals. However, the spot trading in foreign exchange takes real selling and buying by financial institutions and banks to move the prices of the stocks. An attempt at manipulation of the spot foreign exchange market goes futile. An enormous amount of foreign exchange trading is said to occur in the United States even though the Pound Sterling is less widely traded.
- A dynamic market: The foreign exchange market is considered one of the most dynamic markets in the world. Despite which instrument is traded in the market, be it municipal bonds, US treasuries, stocks, agricultural futures, and more, the foreign exchange market’s viability as a feasible investment opportunity continues to remain the same. The foreign exchange is a perfect market to trade as it possesses all the features of liquidity, low transaction, fast execution, and market transparency.
- A 24/7 active market: The concept of a twenty-four-hour market has become a reality in the past quarter-century. The foreign exchange market works round the clock, with financial centers being open for business and trading of currencies every hour of the day and night apart from the possible gaps on weekends. This also means that exchange rates and market changes vary in response to any developments anytime. Hence, the traders and investors worldwide must be alert and active to the possibility of sharp moves in the exchange rate, which can occur anytime and anywhere in the world. This has increased liquidity and has large institutions adapt and introduce various measures to monitor the market on a 24-hour basis.
- High market transparency: The market transparency in the forex market is too high due to the online trading market’s evolution that continues to improve with time. The most significant advantage of trading in the foreign exchange market is trading with the market maker directly. It allows the forex brokers to inform the traders about the executable and streaming prices because it is essential to distinguish between executable and indicative costs. Trading online on the foreign exchange market also means more efficiency and effectiveness as it provides real portfolio and account tracking capability and high market transparency.
- International Dealer Network: The foreign exchange market comprises an international network of dealers from all the nooks and corners of the world. The forex market also includes major financial institutions in the limited number of regular trading activities with customers and foreign exchange. These financial institutions are commercial, which are also investment banks and are dispersed geographically and located in various parts of the world. Even though they are located in distant places, they are linked and connected through computers, telephones, and other electronic mediums. The foreign exchange market comprises 2,000 dealer institutions and around 200 market-making banks globally.
- The Dollar is the most widely traded currency: The more commonly traded currency in the foreign exchange market to date is the US Dollar. The immense use of the Dollar reflects its role as an investment currency in numerous capital markets, also as a reserve held by many central banks, as a transaction currency in several international commodity markets, and also as an invoice currency in many contracts, and as an intervention currency opted by monetary authorities to influence their exchange rates. The use of Dollar has also increased rapidly as a vehicle currency in cross trading over the years.
Along with these unique features, the foreign exchange market provides tremendous benefits like inflation control, high leverage, flexibility, low transaction costs, hedging risks, provides the trading option, and facilitates smooth international trade. The foreign exchange market’s primary functions are credit function, transfer function, and hedging function, and the types of transactions that take place in the foreign exchange market are future transactions, spot transactions, and forward market transactions. This enormous market’s key players include central banks, commercial banks, traders and speculators, brokers, and traditional users and the countries that actively participate in the foreign exchange market are US, Australia, Indonesia, UK, France, Japan Germany, Switzerland, Italy, Malta, Cyprus, Romania, Bulgaria and many Eastern and Central and European countries.