Forex market and its three distinct elements
Although there are many factors that distinguish the Forex market, there are three that can be highlighted to help new traders know exactly what the Forex market means. These distinctive elements are things that any new trader should know well before opening their first trade. The Forex system was created to accommodate the entire world. It is difficult to explain the market, and even more difficult to successfully trade it. The first step to becoming a good trader is knowing how the system works. Before you even consider opening a Forex account, be sure that you fully understand the three distinctive elements of the currency exchange market: geographical, functional and participatory.
Forex is a huge market covering the entire world. This market extends from North America to Europe to China and then back again. No area does not come into contact with this market which makes it very popular. Simply, there is always something for everyone in this market. 24 hour accessibility makes it more attractive to investors. No matter what time of day you want to trade, you will always find someone trading somewhere far in this world. Although forex is always present in every corner of the world, the main trading centers are located in Singapore, Hong Kong, Bahrain, London, New York, San Francisco and Sydney. The geographical factor of the currency exchange market can help new traders realize the size of the Forex market. It is simply a place of unparalleled size which makes it a powerful tool for investors everywhere.
The main functions of the entire Forex market is to transfer purchasing power between different countries. Upon completion of the deals, the partners transfer their returns to their local currency. As the purchasing power of one currency increases, this means that the purchasing power of another currency is likely to become less. The Forex market also works to obtain and provide credit for international trade and to avoid exchange rate disasters. When it comes to international trade, Forex is extremely beneficial as it helps the movement of goods between countries and provides the credit needed to finance it.
There are two main parts to the Forex market. The first part is the interbank, which is usually called the wholesale market. The second part is the customer who is usually called the retail market. These two groups consist of approximately five different types of participants. The first type of participant is banks and non-bank currency dealers who buy at bid prices and sell at asking prices. This helps to support the efficiency of the market as a whole. The interesting thing is that we note that banks usually earn up to 20% of their profits by trading currencies.
The second type of participants includes individuals, investment and commercial companies. This group consists of exporters, importers, tourists and other portfolio investors. They use the market to help them invest. These are usually the participants who use the Forex market for hedging, which is a way to reduce risk.
The third group looking to make a profit from the currency exchange market are speculators. These individuals aim to make money for themselves. And they work for their own benefit. They are looking for profitable changes in exchange rates in order to make a profit for themselves while taking the least possible risk. Big banks are sometimes part of this group.
Central banks and finance ministries are also involved in the Forex market. They use it to change the value of their own currency. Or at least to try to do that. This is done through the use of their reserves. Their motives are not to make a profit but to influence the market. They want their local currency to be worth their interests.
Forex brokers are the fifth and final group of elements involved in the Forex market. They are the ones in charge of facilitating trade, but without participating in transactions. They usually charge fees for their services, which are often in commission. We often look at these brokers as large brokers.