How It Works06/26/12
Forex is a currency exchange market, which means that it involves exchanging of different international currencies for a profit. There can be another reason to purchase the foreign currency – if you want to buy some commodity of another country, besides earning money through the difference in exchange rates. In the latter case, you should purchase foreign currency when its rate is low, and sell it off when it rises. Currency trading is generally performed between the central banks, the government and speculators. As you can understand, the nations won’t be able to trade with each other without existence of a foreign market.
Both the government and the central bank are trying to stabilize their national currency by speculating –buying and selling currencies at appropriate times. This means that they are able to influence the market when trading in huge volumes. However, the government and the central bank must have huge reserves of foreign currency to purchase its own one, so it makes it almost impossible to inflate the currency value artificially.
Forex market sees a huge amount of money traded daily there, but the amount invested by individual traders is very low. Nobody individually is able to have any influence on the Forex fluctuations, even the governments. As you can see, the level of the currency indicates the strength or the weakness of the economy of the entire country. This means that the Forex market is a great place for competition.
Since the banks trade a lot in international currencies, it leads to a chunk of the volume in the financial market. The banks purchase currencies not just as individual bodies, but also on the order of their clients. The banks also trade in lots of futures. Recently, the brokers were able to influence the volumes of trading in the currency exchange market, but thanks to the electronic services available today, the services of brokers are not required, because it is very easy to operate electronically.
Meanwhile, it is only possible to trade with foreign countries if Forex market exists. No Forex market means no common currency between the countries, so it is impossible to evaluate the value of one currency in the other.
The buyer will pay the seller in his own currency. Upon receiving the money, the seller purchases goods in the buyer’s country and sells them in his own country. Only after the operation he can know how much he has made through the export. But in case of Forex, it will be easier for a seller to know his earnings once he conducted an export trade. Accordingly, the buyer will also know the cost he’ll have to incur in order to purchase goods from another country.