Before you venture into the Forex stock market, it is important for you to understand the basic difference between Forex and other financial markets. Forex stock markets operate using computers and are conducted through various international banks. It does not have a physical central headquarter. The market is quite unpredictable. One can double the investment or lose the money within few minutes. But, Forex stock market is preferred by many investors because of the kind of flexibility it offers. It gives the traders the freedom to trade at their own convenient time as the global Forex market runs round the clock for 5½ days in a week.
Advantages of Forex market
Trading in the Forex market is conducted over the internet. All a trader needs to enter the Forex market is a computer and internet connectivity. This allows them to trade at any convenient time. There are automated trading platforms also that take away the pain to watch the market round-the-clock.
If the trader is constantly travelling, he/she can still keep trading by using the computer or mobile phones and PDAs. Hence, trading in the Forex market is possible anywhere and anytime.
Definition Listing
Forex stock market lacks a centrally unified market. It hardly has any cross border regulation. It has Over-the-Counter type of currency markets and various interconnected marketplaces. Varied currency-based instruments are traded in these virtual marketplaces. Hence, Forex stock markets do not have a single exchange rate. The different exchange rates are dependent on the bank and the market players.
The rates of the Forex stock markets might differ, but they are pretty close. This does not leave any place for the Forex stock markets to be exploited by arbitragers. When a particular currency price is quoted, it is considered to be the price of the London market, as it is the dominant market. In 2007, Reuters and the Chicago Mercantile Exchange jointly attempted to be the central market clearing mechanism, but in vain.
Important trading centers of the Forex stock markets
- The most important trading centre of the Forex stock market is London.
- There are other prominent trading centers like Singapore, New York, Japan and Hong Kong.
How does it function?
Banks from all over the world participate in the Forex stock markets. Currency is traded throughout the day in different sessions. Different parts of the world trade at different times. It starts with the Asian trading session, followed by the European session and finally the North American session. When the North American market session closes it is time to open for the Asian market. There are times when more than one major currency markets are open simultaneously. As a result the activity level heightens during these hours when currency movement in one market influences the price in the other market.
Exchange rates
The exchange rates of the Forex stock markets are constantly fluctuating. This fluctuation is caused by the basic law of demand versus supply, monetary flow and the expectations people have regarding the monetary flow. There are many fundamental factors and global incidents that affect the foreign exchange rates. The fluctuating exchange rates are also affected by the interest rate parity, International Fisher effect, Domestic Fisher effect, inflation or the Purchasing Power Parity theory and the GDP or the Gross Domestic Product growth. There are other conditions like huge cross border M&A deals, trade surpluses and deficits, budget and various macroeconomic conditions that influence the market.
The trading of currencies takes place one against the other. Conventionally, the first currency in the pair, also known as the base currency is the stronger one. The second currency, also called the counter currency is the weaker currency. When any vital news is announced publicly it influences the exchange rates.