Let us begin by discussing the forex market itself. The forex market, also known as foreign exchange market, currency exchange or FX market is best described as a market wherein participants are able to speculate on, exchange, buy and sell currencies at determined prices.
Simply put, the FX market is a global decentralized market for currency trading. It is made up of huge international banks, central banks, commercial companies, investment management firms, retail forex brokers, hedge funds, and investors.
By far, this market is the biggest market in the world where the main participants are huge international banks. It processes trillions of dollars’ worth of forex transaction every day.
The forex market operates on numerous levels and works through financial institutions. Behind the scenes, huge international banks turn to “dealers” or smaller number of firms that work in the finance field and are actively involved in huge quantities of forex trading.
The majority of the ‘dealers’ are banks; hence this behind-the-scene market is also referred as “interbank market”.
Though banks are the major participants, there are also other types of financial firms such as insurance companies involved. Trades between these “dealers” can be massive, involving a hundred million dollars and more.
The forex market assists international investments and trades through enabling the currency conversion.
For an instance, it permits US-based businesses to import goods from the states that are a member of European Union and pay Euros even if its income is in US dollars.
The forex market also supports speculation relative to the currency value and the carry trade.
The speculation is dependent on the interest rate differential in between 2 currencies.
In comparison to other markets, the forex market has unique characteristics. Primarily, the huge trading volume represents the world’s biggest asset class, which hence leads to high liquidity.
The forex market also features a geographical dispersion, constantly operating 24 hours per day, except during weekends.
In addition, numerous different factors exist that bring an impact to exchange rates, and investors can use leverage to increase profit as well as loss margins.
With such characteristics, the Forex market is hence considered as the market closest to the idea of a perfect competition.