How Does the Forex Market Work?

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The forex market is the largest financial market in the world and is many times larger than even the stock market. The U.S. Stock market sees about $2,000 billion worth of trades on a daily basis. However, the forex market sees almost $5 trillion worth of trading everyday.

No Centralized Marketplace

Forex is unique compared to the stock market and other international financial markets in that there is no one centralized marketplace for the exchanging of currencies. Trading in the forex market usually happens through worldwide computer networks that connect currency traders with one another. This is known as trading over-the-counter (OTC). The forex market is open 24 hours per day for five and a half days per week. Since the forex market is traded in practically every time zone, price quotes can change rapidly at any time during the day.

Forex Spot Market

Forex is traded three different ways: the spot, forwards and futures markets. In the financial world, a spot market is a market in which sold and purchased contracts are effective immediately. This means goods, in this case, currencies, are purchased for cash and then are delivered on the spot. The spot market is the largest market in forex trading since it is the underlying asset basis that futures and forwards markets are derived from.

Forwards and Futures Markets in Forex

The forwards and futures markets differ from the spot market in that traders do not deal in actual currencies, but instead buy and sell contracts representing claims to specific currencies. The contracts also specify a price per unit as well as the future date for settlement of the contract terms.

In the forwards market, the two parties to the contract determine the terms of the transaction between themselves. Alternatively, in the futures markets, the contracts are purchased and sold on public commodities markets. The futures contracts in the U.S. have a standard size and date of settlement and are regulated by the National Futures Association.

At one time, most traders preferred the futures market due to its availability to individual investors over longer periods of time. However, now with advancements in computer technology, electronic trading platforms have dramatically increased the popularity of the forex spot market. On the other hand, no matter how one trades forex, it is important to understand the fundamentals of what drives the supply and demand of currencies in order to make profitable trades.

Writer Bio

Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and
has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.

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