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Forex
Trading Importance.
Foreign
Exchange
[Forex] involves exchanging of different foreign currencies for a
profit. The reason
for buying the currency of another country may be the need to buy some
commodity of the said country as well, besides making money through the
difference in exchange rates.
In
the latter case,
people buy currency of a foreign country when the rate in the market is
low,
and sell it off when the rates go up. Currency trading is usually done
between
the central banks, the government, speculators and MNCs. Nations cannot
trade
with each other without the presence of a foreign market.
A
huge amount of
money is daily traded in the Forex market, though the amount invested
by an individual
trader may be very low. No one individually can have any influence on
the Forex
fluctuations, not even the government. So it can easily be concluded
that the
level of the currency reflects the strength or the weakness of the
economy of a
country. So this makes the Forex market a good place for competition.
The
government and
the central bank do try to stabilize the currency of their country by
speculating,
by buying and selling currencies at appropriate times. So they can
influence
the market if they conduct a trade in huge volumes, though. To buy its
own
currency, however, the government or the central bank must have huge
reserves
of foreign currency with them. So it is virtually impossible to inflate
the
currency value artificially.
Banks
trade a lot in
foreign currencies and this forms a chunk of the volume in the Forex
market. They
buy currencies not only as individual bodies, but also on behalf of
their
clients. They trade in lots of futures. Till a few years back, the
brokers
could influence the volumes of trading in the Forex market. But due to
the
electronic services available now, the services of brokers is not
required.
It’s easy to operate electronically.
Trading
with international
countries is possible only with the existence of Forex markets. When
there is
no Forex market, there is no common currency between two countries, so
one
cannot evaluate the value of one currency with respect to the other.
The
buyer pays the
seller in the former’s currency. With the money so received, the seller
buys goods
in the buyer’s country and sells those goods in his [seller] country.
Only
then he is able
to know how much he has earned through the export. In the presence of a
Forex
market, though, it is very easy for a seller to know of his earnings at
the
very instant that he conducts an export trade. In the same manner, the
buyer
too will have a thorough knowledge of the cost he will have to incur to
buy
goods from an international country.
What
is forex trading?
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