The currency market is the largest and enjoys the highest level of average daily turnover amongst all the financial markets. Forex market serves many purposes, but its main purpose is to cater the currency requirements of importers, exporters, and travelers from around the world. However, forex trading in Sri Lanka is enclosed in a circle of mystery and confusion. However, here in this article, you will learn what is foreign trading and how the forex market provides a number of opportunities for investors around the world.
What is the Forex Market?
Forex stands for foreign exchange. Forex market is the market where all the interested parties can purchase and sell the currencies. The forex market includes banking institutions, non-banking commercial establishments, investment management companies, and retail forex brokers and individual investors. The forex market is regarded as one of the largest financial markets with more than $5 trillion value of transactions on an everyday basis. The foreign exchange market is not just one market exchange. Instead, it comprises of a worldwide system of computers and brokers from all over the world.
The forex market operates in two ways, the interbank market, and the OTC (over-the-counter) market. In the interbank market, large banking establishments buy and sell currencies with the aim of hedging, making adjustments in the balance sheet, and also for their clients. In the OTC market, individuals buy and sell currencies directly through online platforms and forex brokers.
Brief History Of Forex Market
When it comes to the forex market, all you have to do is switch on your computer, open a forex account with a brokerage firm, deposit an amount, and start trading with currencies straightaway. However, in the past, it wasn’t this easy. In the last few decades, the forex market has changed significantly.
At the end of World War II, major currencies around the world were measured against the economic value of gold. In the beginning, this helped in bringing stability in the exchange rates. However, as economies began to develop after the war, gold became more and more costly. In the year 1971, the gold system was eliminated, allowing the exchange rates to work independently.
In the 1990s, the internet era had begun and many companies were adopting it to create their online networks in order to generate quotes and allow instant trading. Advancement of technology allowed the individuals to buy and sell currencies in the foreign exchange market. Today, foreign exchange market is the largest financial market in the world and every day a large number of investors operate in this market exchange.
Who Trades Forex ?
The traders and investors who trade in forex market come from a wide range of backgrounds, and fields. Some of the key players of the forex market are commercial banks, central banks or countries’ national banks, hedge funds, corporations, and individuals. Let’s have a look at how forex traders are categorized:
a) Institutions and Institutional Investors
The biggest participants in the foreign exchange market are institutional investors and traders. A majority of forex trading money comes from institutional investors and traders, about 94.5% of the market volume.
- Institutions - Physical establishments that directly buy and sell the currencies for their own forex accounts. For example, authorized central banks and commercial banks.
- Institutional Investors: An institutional investor is a larger entity who has access to large funds for investing in the forex market. For example, banks, investment advisory firms, pension funds, etc.
b) Retail Traders and Investors
Retail traders and investors buy and sell currencies from their own private Forex trading account, using their own money. They invest in two ways, short and intermediate term trading, and long-term trading or investing.
Rewards & Risk factor of Forex
You must be already having loads of questions to ask as follows most probably ;
How to make money online ?
How to make money from home ?
How to make money on the internet ?
What are the online part time jobs for Sri Lanka ?
What are the online jobs in Sri Lanka ?
What are the Ways to make money online ?
Forex trading will be one of the best solutions for all above questions but forex market is a financial market and just like any other financial market, it comes with its own set risks and rewards. So let's learn about them before considering forex trading.
- Interest Rate Risks - When a nation’s interest rate rises, its currency also get stronger due to the influx of large investments in the country. Similarly, a fall in interest rate leads to a fall in the value of the currency. Change in interest rate also affects the currency exchange rate, hence leading to risky circumstances.
- Leverage Risks - In forex trading, at the start, a small amount of investment is needed in leverage, known as margin. It is done to get access to considerable trades in foreign currencies. Sometimes due to fluctuations, an investor might have to pay additional margin. Larger fluctuations can lead to hefty losses.
- Transaction Risks - This risk is associated with the change in the exchange rate of the currency between the start and settlement of the trade contract. Forex trading works on the 24-hour basis and exchange rates keep changing and it might even change while a transaction is taking place. Exchange rate might go up and down from the contract price.
- Country Risk - This risk is associated with the economic structure and financial stability of a country issuing the currency. Change in economic and financial position and policies of a country also affects its exchange rate.
- Counterparty Risk - The counterparty is that company in a financial transaction which provides the investor with the asset. The counterparty risk is the risk of non-payment from the trader or broker during a transaction. In the forex market, there is no guarantee on spot and forward contracts on foreign currencies and risks come from the solvency of the broker and market conditions.
- No commissions to be paid - In forex trading, you won’t have to pay any fees or commission like exchange fees, clearing fees, and brokerage commission. Most retail brokers are paid through bid-ask spread. It is the difference between the highest price a buyer is ready to pay and lowest price seller is ready to accept for currency ( for keeping trades open for more than a day may require you to allocate a tiny fee. ).
- Low transaction costs - The cost for a retail transaction usually stays under 0.1% during the normal market circumstances.
- 24-hour trading - Forex market stays open for 24 hours. This is especially beneficial for those who want to trade in currencies on a part-time basis. They can trade at any time they want, be it in the morning, noon, evening or even past midnight.
- Cannot be affected by one single entity- The foreign exchange market is the biggest financial market in the world and there are several participants who trade in this market every day and during all hours of day and night. So basically, a single entity cannot control the market price for a longer period of time.
- Small deposit needed - In forex trading, you can start with a very small deposit in leverage. A small deposit can give you control over a much higher contract price. It means that investors can make big profits with just a small investment.
- Higher Liquidity - In the forex market, liquidity is very high. This is a very rewarding situation as under normal market circumstances, you can buy or sell the currency just with a click of your mouse.
Forex Success Stories
Forex market is huge and opportunities are endless. Let's have a look at some of the most successful Forex traders who changed the ways of forex markets with their approach:
George Soros is renowned as one of the superlative investors in history. He is known for his excellent trading move when he made a profit of over £1 billion from the short position in pound sterling. Moreover, he did this successful deed before Black Wednesday of 16 September 1992.
Soros had a strong grasp over risk and reward factors. It was one of the characteristics of his financial mind that assisted in shaping his reputation as one of the leading Forex traders in the world.
Warren Buffet is an American investor and business tycoon and also one of the richest men on this planet. In 2014, Mr. Buffett was estimated to have an overall wealth of $63.2 billion by Forbes. When it comes to working in the forex market, he works on one simple principle. He believes in having patience and gather a proper understanding of the market so as to earn high profits in the long run. Buffett’s investment plan has been the most successful to date.
Bill Lipschutz earned profits from listing the millions of dollars of Salomon Brothers at FX department in the 1980s, even though he had no past experience of the currency markets. Lipschutz believes that market perceptions along with the market fundamentals help in determining pricing patterns in the market.
You can read more about them and more forex success stories here " Most famous Successful Forex Traders " article by us.
Are you interested in finding the right forex brokers in Sri Lanka? Find out here, ‘ Where to trade Forex Online and type of Forex brokers ? ’