The international currencies market often plays a significant role in your daily life, even if you don’t personally trade forex. While the impacts of a stock market drop may not always be apparent, a change in the value of your currency can affect the prices of goods and services. If you have traveled abroad, you have likely experienced currency exchange and paid rates influenced by current forex quotes and rates.
Forex, also known as FX trading (foreign exchange), is a distinct asset class that sets it apart from stocks, commodities, and bonds. Understanding its unique characteristics sheds light on why the global forex market is so vast and necessary.
Forex involves the buying and selling of sovereign currencies and other forex products. When we exchange currencies at a bank or bureau de change, the rates we encounter are directly determined by the happenings in the forex market.
Fluctuations in exchange rates are influenced by a combination of economic conditions, global events, interest rates, politics, and other factors. Consequently, forex is highly liquid and boasts the largest trading volume among financial markets.
The forex market encompasses two primary activities: trading to facilitate economic transactions and speculative trading. Companies and entities operating in international markets must engage in buying and selling foreign currencies. Repatriating funds or purchasing goods overseas are key use cases of the forex market.
Speculators constitute the other side of FX trading. They engage in short-term, high-volume trading to take advantage of minute currency price fluctuations. The forex market is replete with arbitrage opportunities for speculators, contributing to the immense trading volume within the market.
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