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The Facts of The Currency Trading Market
Recent reports claim that currency trading went up by 38 percent between April 2005 and April 2006. This increased has more than doubled the figures since 2001. Additionally, the onset of the internet has made retail Forex trading available to even the small investors who can take part even in the comfort of their homes.
Unique features
The Forex market possesses several unique features unmatched by any other financial market in the world.
- It has the huge trading volumes compared to the equity markets.
- It is the most liquid market globally.
- It has a huge number and variety of traders in the market.
- Currency trading takes place globally and not limited to just one country.
- It entails long trading hours, 24 hours each day except on weekends.
- It takes into consideration various factors that influence exchange rates.
- It has low margins of profit than other markets of fixed income.
With its uniqueness, the Forex market is even considered the one closest to the still unattainable perfect competition.
No central governing body regulates currency trading and participants trade directly with one another. All transactions occur via phone or electronic network. There are, however, several marketplaces that are interconnected with one another and where different currency instruments are being traded.
Major Forex trading takes place in London, New York, Tokyo, Hong Kong and Singapore. The United Kingdom, notably London, is the largest trading center. Its global transactions as of April 2006 were pegged at 32.4 percent, up from 31.3 percent in April 2005.
The daily turnover in the currencies worldwide comes from two major sources. One is the foreign trade which accounts for five percent. This pertains to companies buying and selling products in foreign countries as well as the conversion of profits from foreign sales into the domestic currency. The second source is speculation for profit which accounts for 95 percent.
Factors affecting Forex
Various factors influence the foreign exchange rates. The prices of currencies, however, depend on the law of supply and demand. A certain currency”s supply and demand as well as its value is not influenced by only one factor. Basically, several factors are taken into consideration and are categorized into the economic events, political situations and market psychology.
Numerous economic forces affect the world”s currencies. These include rate differentials, domestic money supply growth, central bank intervention, political climate and comparative rates of inflation.
History of Forex
Money has been used in many forms since the ancient Egyptian times. The Babylonians are credited for inventing the paper bills and receipts but the money changers from the Middle East are said to be the first to use coins for trading goods between different countries.
It was, however, only in 1973 when the concept of foreign exchange developed. Since that year, the currencies of major industrialized countries became freely floating and controlled by the supply and demand forces. This went on through the 1970”s eventually leading to the development of new financial instruments, market deregulation and trade liberalization.
