Meaning of Forex (Essay on Forex)
The Foreign Exchange Market or Forex is referred to as the global financial market where currencies are traded. The Forex or the Forex Market determines the relative values of different currencies i.e., the value of one currency in terms of other currencies. Companies, banks, and institutional investors are the major participants in the Foreign Exchange Market as they conduct business internationally. RBI, the central bank of India, is also a big user of Forex. Great Britain has the largest share in the forex market.
Importance of Forex
The foreign exchange markets aid in facilitating trade, investment, and financial transactions on an international basis. The business houses should be exposed to the access of foreign currencies and trade in it else their prospects would become limited and which will, in turn, affect global economic growth. Many retail investors and traders use the forex market. Some investors consider currencies as one of the assets to opt for investment. These markets help firms to carry out transactions in foreign currencies and to convert the currencies they possess into the currencies they want. Foreign exchange transactions are mostly handled by banks and forex dealers.
Pros and Cons of Forex
Advantages of Forex
Regulation is almost absent in these types of markets. There is no concept of a central bank associated with the forex markets for controlling the same. The markets operate throughout the day for 5 days a week except for the weekends. creates a very flexible scenario for traders.
Information regarding forex markets is easily available. The traders located all around the globe are well informed regarding the markets which enables them to carry out trading in a smooth manner.
A wide variety of trading options are available. One can trade in hundreds of currency pairs. A trader can enter into a spot transaction or enter into a future agreement. The volume of trading in the forex markets is massive. Trading in the forex market occurs the most than in any other market.
Forex provides the scope to a trader to make an entry into the markets and exit from the same during any time operation of the markets.
Forex markets facilitate the traders to execute trades incurring low costs of the transaction. The transaction costs are lower than any other market as well.
Forex markets provide leverage higher than any other financial asset market. This facility in the Forex markets facilitates the traders to take trades in multiples of the amount kept by them as margins.
Disadvantages of Forex
There is no presence of a centralized exchange to ensure trades on a risk-free basis. Therefore, there is always a risk that the counterparty of a contract may not be having the intention or ability to perform his/her obligations related to the contracts. Mostly counterparty risks are associated with transactions involving very large amounts.
Although leverage is a blessing, on one hand, it has drawbacks as well. As there are no limits of the volatility in the Forex market on any day, in the event of an adverse movement in the markets, a person may probably lose all of their investments in a few minutes.
Therefore, traders have to take up algorithms so as to protect the valuation of their investments when they are away from the trading screens. If a trader is not having the capital or the knowledge to cover their open positions, they may suffer a significant loss of value of their investments, when they are away from the trading screens or when there is the weekend.
Conclusion on Essay on Forex
The foreign exchange market is the biggest financial market in the world. The only way for a trader to achieve profitability in Forex trading is to work hard and develop a solid understanding of the markets. A person not only is required to be aware of what is happening in the economy of his/her nation but also should be abreast of the global economic scenario as well.