Foreign exchange market refers to trading in foreign currencies. Just like any other tradable commodity in the market, foreign exchange includes multiple currencies, brokers, financial institutions and individual investors who hedge on the hike or fall in the value of a currency. There are various advantages of foreign exchange market. Let’s have a look at those:
There are no geographical or localized constraints in foreign exchange market. Investors are free to trade in currency pairs from across the globe. The constant buying and selling of different currencies from different locations makes foreign exchange a kind of global market. It is estimated that over 4 trillion dollars change hands in financial markets everyday
Since there’s neither any regulatory authority nor any cap on the money that can be traded daily, foreign exchange market offers a lot of flexibility both to rookie investors as well as seasoned players in the market. Foreign exchange market also operates round the clock, so there’s simply no issue of time constraints or the need to schedule trading hours according to a different time zone. By sitting in India, you can trade in foreign currencies you want and at the time of your convenience. The complete liberty to trade at any time and without any restrictions on the amount, makes foreign exchange market in India quite popular among those who have a day job and are in the currencies market as well.
Markets are usually not immune from unscrupulous practices like insider trading and other malpractices that tilt the advantage towards a few to the detriment of a vast majority of individual investors. However, since the foreign exchange market literally spans over multiple continents, countries, geographies and time zones, the possibility of it being rigged or manipulated is very low. With an extensive global scope, there’s no central bank or a national supervisory authority that can interfere much with its working or saddle it with regulations. This makes the foreign exchange market both highly transparent and efficient.
Wide range of trading options
With currencies of virtually every country up for trading, there are multiple trading options. Based on their priorities, traders can either enter into spot trading or future agreements. There’s a multiplicity of options available in future agreements to. Be it a small investor or someone with massive cash flow, there’s an option for everyone in the foreign exchange market, according to the risk aversion level. The volume of everyday transactions in the foreign exchange market is higher than any other market, which leads to enough liquidity. Traders can both enter the market and leave it in a few minutes.
Low transaction costs:
Most types of trading, whether stocks or commodities, include a certain commission or transaction fee, which varies based on several factors. Transaction cost in foreign exchange market is among the lowest, as it functions differently from other markets.
There’s usually no commission charged in foreign exchange trade. In exceptional cases of big transactions, the commission is very low. No exchange fee or clearing fee is charged as well. Unlike stock brokerage firms, dealers in the foreign exchange market earn revenue via ‘the difference between the quoted buying price and the bid, which is mostly very low. This difference is known as ‘spread’.
High volatility is usually considered negative for markets, however in foreign exchange market it can be a positive force as well. Fluctuations in foreign exchange market usually depend on external factors like political turbulence, economic growth, stability of the country, investors’ confidence, any new government policies or regulations, or natural disasters.
With the exception of natural disasters, all of the above events don’t strike randomly or unpredictably. They build up over a long time and the change is rarely sudden and dramatic. This gives informed investors the chance to decide whether to pull out or infuse more money in the markets. Major economy currency pairs and emerging market ones are associated with high volatility. Foreign exchange rates mostly hinge on economic indices and political stability.
Since foreign exchange market operates 24X7 across 6 continents, 100+ countries and dozens of different time zones and the daily transaction volume is enormous, it requires seamless and uninterrupted connectivity for minimizing any lag. It being completely decentralized and not under any single supervisory authority, also gives impetus to constantly improvise the trading platforms. Technological advances are swiftly embraced by the foreign exchange market. Nowadays, there are dozens of mobile apps with a truly easy and customer-friendly interface and connectivity.
Foreign exchange market has the highest leverage among all asset markets. It allows the investor to take risk and increase the profit margins exponentially. However, the downside is that since it’s risky, there may also be the possibility of a loss, so investors should use leverage at their discretion and after taking in consideration all odds. Due to the high leverage involved, even though pace of market movements is really slow, individual traders can make huge profits.
As a practice simulation so that you can learn the tricks of the trade, a lot of foreign exchange market dealers offer demo accounts. Everything about these accounts is real except that it involves dealing in token play money, instead of real currency deals. For those looking for a dummy trial before they start with real trading, a demo account can get really helpful both to get the drill and boost your confidence.
By being truly global and operating across multiple time zones, foreign exchange market offer great liberty to traders. There are other advantages as well such as range of investment options, very low transaction fee, zero or negligible commission and a demo account for hands-on practice. If you always wanted to trade in foreign currencies, then once you are familiar with market basics and have a know-how about which currency pairs to choose, you are good to trade in the foreign exchange market in India.