Importance of Forex trading
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.
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