Written by in Business on October 28, 2020
What is forex? Good question! There’s a good chance you’ve encountered the term forex or FX in financial discussions in the past. While you may be familiar with the term, maybe even with its meaning, you may be curious about how it is carried out or what impacts it may have.
What Is Forex?
Forex simply refers to the foreign exchange market, also known as the FX market. While you may be familiar with trading currency over when you’re travelling, the foreign exchange market is far larger and far more powerful than you might think. In fact, forex is traded 24-hours a day, 5 days a week around the entire globe. It is entirely decentralized, fast-paced, and always changing from one second to the next.
Currencies need to be traded in order to conduct business in foreign countries. Therefore, if you exist in one country and want to conduct trades or business operations with another, it’s necessary to exchange currencies. In addition, currency exchange is an essential part of travel in many cases.
In its simplest form, forex is exchanging one currency for another. Though, an advanced foreign exchange trader will employ a number of strategies and systems to protect themselves from loss and potentially even set themselves up for financial gain.
What Is Forex Trading?
The foreign exchange market is simply a decentralized network of buyers and sellers. While there are practical purposes for foreign exchange such as travel and trade, a majority of the exchanges made on the FX market are with the goal to pay or receive funds from another country. Or, protecting oneself from loss. Currency is characteristically volatile.
In this way, the constant price movements make the market a breeding ground for both high risk and uncertainty. You simply can’t have one without the other. Volatility offers participants an opportunity to make exchanges and capitalize on the moving markets.
Types Of Foreign Exchange Markets
There are three types of forex markets: spot forex market, forward forex market, and future forex market.
A spot forex market is the physical exchange of a currency pair. A spot market takes place when an actual trade is made between two parties on the spot or within a short period of time. The spot is the baseline, it is what the forwards and futures markets are based on. The spot market is when currencies are bought and sold based upon the current price at that very moment.
Conversely, the forwards and futures markets don’t trade in actual currencies. In fact, they dealt n contracts that are linked to certain currencies, prices per unit, and a future date.
The forwards market includes contracts between two parties who come to an agreement between themselves. The futures market, on the other hand, deals with contracts that are bought and sold based upon a more standard amount and date on public markets.
Both are binding contracts to be settled. The forwards and futures markets are mainly used to protect from loss in the case of future fluctuations.
The Risks Of Forex Trading
As we mentioned, the forex market can be high risk. The market is wildly complex and constantly changing. In addition, the markets are unregulated in some parts of the world. Therefore, delving into the market is not something you should take lightly. We always suggest consulting or partnering with experts for complex financial exchanges such as FX trading.
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