Stock and share markets are becoming more accessible today, with more people opting to trade by themselves. With so many new people coming into trading, trading awareness and trading tips are abundant online. While people are trying to become experts at trading, several platforms are making trading effortless. These platforms help people manage their finances better, especially for trading novices. But even when relying on these platforms, people should have a basic understanding of the trading markets. One primary aspect is to know the different markets like forex, shares, securities, futures, etc. Forex markets or foreign exchange markets (abbreviated to FX markets) need an in-depth understanding to trade with, so it is better to rely on experts first. The FX market is intriguing as it deals with trading with foreign currencies. This concept may seem confusing but is effortless to grasp. Read on to understand foreign exchange trading better.
WHAT IS THE FOREX MARKET?
Most people would have heard of the stock market or the share market, where people trade stocks and shares. The FX market works similarly, but there is no physical market where the trade happens. Stock exchanges are physical buildings for stock trading, but no such platforms exist for foreign exchange trades. Traders trade foreign currencies online, and the market is open 24 hours on five days of the week. The market exchanges only money, making it one of the most liquid trading markets (A liquid market trades liquid assets like money). One unique feature of this market is that it deals with combinations of two currencies, for example, the USD and the AUD. The trader exchanges one for another; generally, they exchange the lower value for the higher value.
WHY FOREX TRADING?
People will now understand the FX market, but they may wonder why it exists. The FX market works like any other trading market and helps build assets for traders. This asset is liquid and thus less volatile, as the currency will still hold value (even if it fluctuates). Several reasons exist for people to indulge in foreign exchange trading, but the common is usually hedge funding.
Hedge funds work like backups when the economy fluctuates a lot. People with multinational businesses benefit from this trading, as they can guard against any drop in currency value. For example, if their home currency (the company’s headquarters) rises in value against other currencies, they may end up making less money than before (imagining their profits are stable). So if the company profits 100 AUD and it was equal to 100 USD (1 USD = 1 AUD in this scenario), and if the USD rose to 2 AUD per 1 USD, they would be making only 50 USD for the same 100 AUD, after the conversion. This change can lead to losses, but if the company invested in the US dollar, expecting this change in the future, they can sell those dollars now and make a profit (as they would have paid less at the time than now).
FOREX TRADING: THE GIST
So it may seem that foreign exchange trading only benefits large multinational companies. But currency exchange rates affect everybody, and everyone can benefit from FX trading. People will require experience to understand the market and invest in the best currencies (currencies that are likely to increase in value in the future), but some agencies help novices get started. Additionally, factors like future markets and spot markets are other crucial concepts people should be familiar with, but these agencies help them understand it better. Any currency will never become “valueless” and is therefore always an excellent investment option.