Introduction To The Foreign Exchange Market For Beginners

Understanding the basics of a foreign exchange market and knowing what it is, what happens and what one does in this market can get very complicated and confusing, especially for beginners. Here is a simpler, easier guide to the foreign exchange market created and written just for beginners, especially those who are new to the financial world.

The foreign exchange market (usually referred to as the forex, FX or currency market) is a global financial market where a currency is traded for another, and also determines the relative values of various currencies. The forex is one of the largest, fastest, most popular, yet most volatile markets in the world, as numerous people and organizations trade currencies for several different reasons. FX markets are always on the go, supplying people with an accessible and target-rich trading atmosphere.

A typical FX transaction consists of a person buying an amount in one currency by paying the equivalent amount of another currency. The foreign exchange market helps in international trade and investment, by offering cash conversion. For example, currency conversion is the reason why online jobs and online shops exist – it is because transactions can be made conveniently online even if a currency on one end is different from the currency on the other end. This is also where exchange rates come in.

Majority of the market consists of several currency traders, who speculate on the status of currencies and try to take advantage of even the tiniest change in exchange rates. Adjustments in the exchange rate occur whenever the values of money change. The tiniest change in exchange rates not only affects the market, but also affects everyone else, because it will influence decisions in which currency people want to buy or sell.

Currencies are traded against each other. Every pair of currencies consists of just one product, usually expressed in the format XXX/YYY, where YYY stands for the ISO 4217, which is the international three-letter code for money, while XXX stands for the price of one unit currency expressed in the value of YYY, for example GBP/USD stands for the value of the British Pound in US Dollars, as in 1 British pound = 1.58100 US Dollar.

The foreign exchange market is an over-the-counter market, meaning there is no single universal exchange where buyers and sellers meet to trade cash. The forex operates 24 hours on weekdays only, where transactions can also be made via phone, fax or e-mail. They also work between individuals with FX brokers, brokers with banks, and banks with banks.

The foreign exchange market is the most liquid financial market in the world. However, this doesn’t mean that money isn’t subject to unstable liquidity conditions that traders need to remember. Liquidity is defined as the number of active traders and the overall amount of trading present in a particular market at any time. Traders include commercial banks, central banks, investors, speculators, investment banks, businesses and consumers.

Consumers do not set up prices; all they do is buy and sell, depending on the exchange rate in the country that they are in.
Investors and speculators require different kinds of money to buy and sell shares, real estates and other investment tools.
Businesses that import and export goods they have bought or sold, need to trade currencies when getting paid or making payments.
Commercial and investment banks set the prices. They buy and sell different kinds of cash at bid-and-offer exchange rates that they affirm through foreign exchange dealers.

Central banks trade money to help in government financial policies and in polishing the value changes of their economy’s currency.

By: Cedric Loiselle

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