What is forex?


Forex stands for foreign exchange. Forex trade accordingly refers to any transaction (money exchange) which involves two different or multiple currencies.

Forex market is thus the largest market in terms of volume of trade. This is because the market involves participants transacting from all across the globe.

The rate of one currency against the others is purely dependent on the demand of one currency with respect to another currency and keeps varying. Thus if 1USD was exchanging against 0.67 Euro at one time and then because of increase in demand for USD the it now started exchanging for 0.68 Euro, the value of USD is said to have ‘appreciated’ and the value of Euro is said to have ‘depreciated’.

The following types of participants trade in a forex market:

1. Exporters- Importers – They are the prime participants as their trade involves two or more currency. Exporters and importers do and underlying exchange of products or services followed by this forex trade.

2. Speculators/traders – These people do not do any underlying exchange of goods and services but play in the market looking for opportunities to gain from fluctuations. Thus if they anticipate the price of one currency to increase with respect to another currencies, they will buy and ‘hoard’ that currency to sell at a profit later.

3. Arbitrators – These are again a variety of speculators, who keep a tab on prices of more than 2 currencies. If the value of currency 1 against currency 2 rises by say 1% but the value of currency 1 rises by say 2% against currency 3, there will arise a chance to make a profit by buying currency 2 and first converting it to currency 1 and finally using the fund so converted to buy currency 3. This is how arbitrators make money in the market.

4. Forex dealers – These are representatives of the Central bank of each country who are allowed to act as a platform where the trades are to be done. They are also called authorized dealers (A.D) or money exchangers. Typically banks and finance companies undertake the role of an A.D. These dealers charge a brokerage on each transaction executed through them.

5. Analysts – these are the people who try to understand and forecast the movements in values of currency. They thus act as advisors to the other participants of the market. Forecasting of rate movements is based on factors. If they try to analyze overall economic scenario of a country to anticipate the demand for its currency it is called ‘fundamental analysis. However if the forecasting is based purely on the sentiments of the other market players, it is called ‘technical analysis’.

Regulators – Each country has its own set of regulating agencies that are set up as watchdogs to put a tab on unfair trade practices. Because each country will have different sets of norms and regulations, foreign exchange market has a lot of complexities.

The forex market is open 24 hours a day due to difference in time zones across the globe.