What is foreign exchange? Basic information you should know

Foreign exchange is a term used to refer to the means used in international transactions. Let’s find out more details about this concept here.
In business, we often hear about the phrase forex, many people often think of foreign exchange as a word with a similar meaning to foreign currency. However, this is actually a wrong thought. The following article will provide you with a correct understanding, fully understanding what the word forex is?

What is foreign exchange?

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Foreign exchange (forex) is a term used to refer to the means used in international transactions (International transaction) including:

  • Foreign Currency: Foreign currency is a foreign currency or a common currency of a group of countries.
  • Payment instrument in foreign currency: This is a payment instrument recorded in foreign currency such as: Check (check), bill of exchange (Bill of Exchange), promissory Note, bank card (Card Bank), Transfer
  • Vouchers with prices in foreign currencies such as: Government Bonds, Corporate Bonds, Stocks.
    Gold (Gold): Including gold belonging to the state reserve, gold on a resident’s foreign account, solid gold, bullion, and gold bar.
  • Local Currency – the local currency, the national currency that is considered foreign exchange if that currency is used in international payments, or is transferred in and out (import / export) out of the country.
  • Cryptocurrencies: Currencies that are secured by the processing power of a global network of computers instead of governments. For example: Bitcoin, Ethereum …

What is forex trading?

Foreign exchange transaction is an exchange of foreign exchange / foreign currency also known as FOREX or FX or spot FX is the trading and exchange of foreign currency goods and papers of foreign currency payment value on the national market It is the number one largest financial market in the world, with daily transactions reaching $ 5.3 trillion per day.

What is the forex market?

The foreign exchange market (Forex, FX, or money market) is a global decentralized marketplace for the exchange of currencies. The main players in this market are the major international banks.

Financial centers around the world function as anchors of exchange between a wide range of different types of buyers and sellers around the clock, except on weekends. EBS and Reuters’ dealing 3000 are two main interbank FX trading platforms. The foreign exchange market determines the relative values ​​of different currencies.

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If you compare the $ 25 billion New York stock market traded every day, you can imagine how huge this market is. Compared to the stock market, Forex has a much larger scale, so forex trading is extremely liquid, can enter or close orders immediately, unlike securities with limited trading time. and not always able to match orders.

In a foreign exchange transaction, one currency is sold in exchange for each other. An exchange rate represents the relative value of the two currencies. Currencies are typically identified by a three-digit “Swift” code. For example, EUR = Euro, USD = US Dollar, CHF = Swiss Franc and so on.

See also: What is GDP? How is GDP calculated?

Things to know about the forex market

Objects of transactions on the foreign exchange market

In the past, only large financial institutions and high net worth individuals could access the money market. However, in recent years, thanks to the application of technology, many customers can buy and sell currencies from anywhere using a modern, safe and secure online trading platform.

Some of the main customers participating in this market include:

Government and Central Bank

Major national governments and their central banks include: The Federal Reserve, the Bank of England and the European Central Bank are the biggest players in the foreign exchange market. .

Big bank

Some of the world’s largest banks, such as Goldman Sachs, Deutsche Bank and Citibank, trade huge volumes of currency on the forex market on a daily basis, both for themselves and for their clients including corporations. large, government agencies and individuals with high net worth.

Forex broker

Forex brokers provide access to the global currency markets for retail investors of all sizes through online exchanges.

Retail investors

According to statistics, about a third of the daily trading volume in the forex market is now carried out by retail investors. That proves individuals who are trading approximately $ 1.5 trillion in currency on a daily basis, have access to the forex market through the trading platforms offered by forex brokers.

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What are commodities exchanged in the Forex market?

The main commodity in forex trading is MONEY. Foreign exchange trading is the trading of buying one amount of money and selling another amount at the same time. Money will be traded through brokers or exchanged directly in pairs; for example EUR / USD or GBP / JPY.

Foreign exchange trading in the market. Simply think that buying a certain currency will be complicated for many people because they cannot buy and sell the product that they are trading on the market.

The working mechanism of the foreign exchange market

There is no central market for currency swaps, but transactions can only be done through the counter. The forex market is open May 24 / week and currencies are traded globally between financial centers such as London, New York, Tokyo, Zurich, Frankfurt, Paris and Sydney, Hong Kong, Singapore …

In the last decade, only financially strong companies entered this market. Minimum condition if you want to trade in that time is that you must have between 10 and 50 million USD to get started.

Foreign exchange trading was born at first with the aim of meeting the needs of banks and large companies in the industry, not for retail investors. However, with the miraculous support of the Internet and online trading systems, trading companies have emerged allowing us to open small accounts for us. Today, brokers are allowed to break large trades and allow small deals the opportunity to buy or sell any of these smaller values ​​(lots).

All you need to start Forex trading is a computer, an Internet connection, and information and knowledge about the market. At that point, you will really understand what forex trading is. With the above important information, you must have a basic understanding of what forex is and the issues surrounding this concept.

See also: What is ROA, ROE? How to analyze finance by ROA and ROE

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