Forex Market: Meaning, Advantages and Disadvantages

Meaning of Forex Market

Forex market is a market that deals in foreign exchange and where currencies of different countries are brought and sold. It is the world’s largest financial market with a turnover of around $5 trillion on daily basis, involving a large number of peoples around the globe. Forex market is also termed as FX market or foreign exchange market. This market is basically composed of various markets, as the trade which takes place in between individual currencies in this market is also constituted like a market. Like, forex., trade occurring among the US dollar and Chinese yuan will be treated as a market and comes under the forex trading market. 

A forex market operates 24 hours and 7 days a week. This market is (OTC) over-the-counter and dealers’ market where transactions are processed using telecommunication technology. The forex market is a medium available to banks, commercial companies, central banks, investors, retail forex brokers, and investment management firms for buying, selling, and exchanging currencies required for both speculative as well as hedging purposes. There is a wide network of computers and brokers who operates all-round the globe and made the processing of large transactions in the forex market possible. 

Characteristics of Forex Market

The characteristics of forex market are as discussed in points given below: – 

Excellent market transparency

Market transparency relates to better access to trading information in the market. The forex market is the most transparent market where traders can completely access the market information needed for doing transactions efficiently. All transactions taking place are recorded in electronic form and updated quickly which facilitates better transparency of data. It results in monitoring the fluctuations in currency prices of different nations via the real-time portfolio. 

Lower trading costs

The forex market has a special feature of lower trading costs where a very small percentage is charged for placing a transaction. Traders don’t need to pay high commission costs unlike other forms of investment. A mini forex account can be opened with just a few hundred dollars (i.e., 250$ or less) and trading can be started. All this makes it possible for small investors to participate in trading and earn decent profits at a lower cost. The variations involved in buying and selling price of currency pair is overall cost associated with forex trading. 

Highly dynamic market

It is one of the most dynamic markets in the world as the prices of currencies change very frequently. The currency keeps on fluctuating every second and hour. The forex market is a highly active market that functions all 24 hours a day. There are strong market trends that need to be properly studied by forex traders by gathering accurate data about the market. The directions of forex market trends are predicted for finalizing the investment decisions. 

Over-The-Counter market

The forex market is an over-the-market functioning in different countries across the globe. It is a highly unregulated market that initiates over-the-counter trade by banks using telephone and telex. There is an absence of an official code that prescribes what all is considered a good market practice. Banks have all express powers to exercise the buying and selling of foreign currencies. In addition to this, the commercial banks or Securities and brokerage firms do not require any special license or authorization in order to deal in foreign trade. 

International network of dealers

The foreign exchange market is composed of an international network of dealers that are geographically dispersed. In this market, a medium is established between the dealers and customers. Most of the dealers are investment banks and commercial banks which have their institutions located in many financial centers around the world. All of them, irrespective of their location, are in close connection and linked to one another via computers, telephone, and other means of electronics. 

Superior liquidity

Forex market offers a superior liquidity rate to traders because of its vast market size and geographical spread. Transactions worth $5.1 trillion are processed each day. Traders can at any point in time either buy or sell currencies in an easy manner without any changes in prices. The market is highly active where there is always some sort of activity going on at any given point of time. This better rate of liquidity facilitates traders in earning the same profits which he/she expects at the time of making the trade. 

Advantages of Forex Market

The advantages of forex market are as follows: – 

Flexibility in trading

The forex market provides a high degree of flexibility to traders with respect to the trading of goods and services. In this market, there are no restrictions on how much currency can be used for trading purposes. Investors also do not need to follow many rules and regulations, unlike other investment markets. The market operates on a 24 X 7 hours basis with no issues at all. Due to this flexibility of time and work, peoples who are doing regular jobs can easily work on forex trading as part-time jobs.  

Reasonable cost

Forex market is a reasonable market for doing investment as compared to other options available. The individual can start trading without any limits with an even amount of money. The cost of investment is quite low which makes it a reasonable factor of investing as well as trading. There are not many brokerages involved here as dealers are directly involved via reserving themselves for covering risk. 

Individual control

This is one of the fundamental advantages offered by the forex market. An individual involved in forex trading has full control with regard to doing trade. The person is not under any compulsion from anyone when doing forex trade. Individual doing trade has full power in his hand to take the final decision whether to enter the trade or not. He is free to decide whether to take risks in regard to earning money. 

Practicing

The forex market also provides the opportunity to individuals of practicing before entering the real investment world. A ‘Demo Account’ which is just a replica of the actual trading account is provided to traders for practicing and improving their knowledge level. This way a person can easily realize whether a trading career suits him or not thereby bringing down the possibility of risk occurrence. 

Wide trading options

Forex market offers a wider range of investment options to people where they can make choices as per their needs. Traders, businessmen, importers, and exporters can select among a variety of options and trade in various currency pairs. An individual has the option to either enter into future agreement contracts or spot trade. This way, considering the risk factor and budget of investors, the forex market provides a wide variety of trading options. 

No involvement of central exchange

Another major advantage of the forex market is that there is no involvement of central exchange. The central exchange interferes in the very rare or extreme conditions in foreign exchange market. Investors benefit more from such a market where there is no instance of a sudden surprise in price manipulation or price falls. It is not like the market of company’s (one dealing in equity shares) which changes very frequently. 

Profitable gains

Forex market offers maximum possible leverage to traders as compared to several other financial investment markets. It enables traders to lever their investment which had been done 20 to 30 times more and trading in the forex market. Although, the forex market operation is quite small then also investors can either win or lose a big profitable amount. 

Disadvantages of Forex Market

Disadvantages of forex market can be well-understood form points given below: – 

High volatility

Higher volatility in the forex market is one of its major disadvantages. There are large variations going on in global politics and the economy. These changes influence the forecast and diagram about the forex market which makes it difficult for investors in taking risks and deploying funds. In case if a market goes downhill, it can eventually result in large losses for investors. 

Price determination process

The process of price determination in the foreign exchange market is very complex. The rates get fluctuate and influence by a variety of factors. The rate of currency varies a lot due to world politics and the economy resulting in uncertainty of price. Technical knowledge and indicators are used as key parameters for doing trading and deciding whether it is going to be lost or not.  

Risk factor

The forex market involves a high degree of risk due to its high leverage option. There is always an uncertainty factor in the price or rate of the currency. One needs to be very focused while trading in the forex market as it can either result in better profits or huge losses. Proper knowledge about forex trading is a must in order to make accurate future forecasting. 

Scammers

Forex market trading is also vulnerable to lots of scams going on online these days. There are many scammers who are always active and ready as foxes drooling to loot money from investors. Therefore, utmost care must be taken by investors while choosing a reliable and trustworthy person. Many fraud and cheaters are present in this market and it totally depends on the investor to make the right decision and go with the right person. 

Fear

Traders are also filled with fear due to the high-risk factors in the forex trading market. They find difficulty in doing trading as because of uncertain environment, fear gets inculcated in them. Therefore, it is a must for a trader to be well-educated and mentally strong in order to do their investment wisely. Selecting a brokerage with perfect knowledge can however be a good option to overcome this disadvantage. 

24 X 7 Market

Forex trading market is the most active market in the world operating on 24 hours basis. The investor also needs to remain active all the time due to the non-sleeping factor of the forex market. He needs to keep himself updated about every minute as there are lots of fluctuations taking place at every point in time. The market can go unpredictable during any hour which requires investors to be due attentive.