Foreign Exchange Market is a massive hub that builds network of various participants “over-the-counter” which means the traders are not advised before investing. Forex brokers in every second buy and sell their currencies if they find it favorable in terms of profits.
In major trading hubs, professional money exchangers act as forex brokers who cater to the needs of traders and make a profit from the fluctuating exchange rates. There is a huge trading volume due to significant number of traders and brokers in the forex market. Participants who frequently trade have a room for leverage.
This is the market where major banks exchange currencies with each other to eliminate the risk of arbitrage usually. How do they transfer the amounts? So, there are two major platforms that act as an intermediary; Electronic Broking Services and Thomson Reuters Dealing.
Constitutes of Interbank Market
- Spot Market where currencies are traded for immediate delivery at the current market rate.
- Forward Market is where contracts for future delivery is traded. It is purchased (sold) at current rate and sold (purchased) at forward rate.
- SWIFT known as Society for World-Wide Interbank Financial Telecommunications. This acts as a network to send and receive information about financial transactions.
Currencies are usually traded in established pairs. Value of one currency is expressed in relation to the other currency in that pair. For instance, one party buying a certain quantity of a certain currency from another party by exchanging another quantity of currency.
The 4 most frequently traded pairs are; Euro and U.S Dollar, U.S Dollar and Japanese Yen, Pound Sterling and U.S dollar, U.S dollar and Swiss Franc.
Retail Foreign Exchange Trading
This preoccupies a small segment of the foreign exchange market. For carrying out foreign retail trading, you need to sign up with the companies that provide this service. You make a deposit into your trading account. You will be offered with an option of partly trading on credit, where the size of credit is determined by how much money you have in your account. This is also known as margin trading or leverage.
However, using credit to speculate on the foreign exchange market is very risky and you can end up owning the provider much more money than what you deposited.
Speculators have step up their level by carrying out huge trading due to the gradual shift from controlled exchange rates to floating exchange rates for their national currency.