The Foreign Exchange Market, also known as FX or Forex, is the largest global financial market. It is decentralized, and in its simplest explanation, is the system where one currency is converted into another.
How does the FX market work?
$6.6 trillion is traded every day on the foreign exchange market, making it the largest and most liquid financial market in the world. As no government or body is in charge of FX, it is instead an electronic network of banks, brokerages, traders, and investors.
Forex traders benefit from the continual fluctuations of different currencies, playing them against one another, and attempting to buy when it is profitable for them to do so. For example, a U.S trader may exchange dollars for GBP when the pound is weak, and then sell again when the pound strengthens over time.
What impacts forex rates?
Currency fluctuations occur for a number of reasons, including geopolitical risk, trade, investment, tourism, and inflation. High inflation can have a significantly negative impact on any specific currency’s value, and therefore the foreign exchange rate.
How is currency listed on the foreign exchange?
When looking at the Foreign Exchange, an individual or a business will see that each currency is listed in pairs, which equate to the currency they are being compared to. For example, USD/GBP would be the U.S dollar compared to the Great Britain Pound. Next to this will be a price for the pair. Let’s take an example of US dollars compared to Canadian dollars. The countries will be listed as USD/CAD. If the number says 1.2413 it means it costs 1.2413 Canadian dollars to purchase one U.S dollar. When the price increases, the value of the U.S dollar has increased against the Canadian dollar, so it will now cost more to buy the same amount of US dollars.
Traders, investors, banks and individuals will trade using lots on the FX market. The types of lots have different names depending on how much of any given currency is being purchased. For example, a Standard lot is 100,000, a Mini lot is 10,000 and a Micro lot is 1,000. Traders then choose how many of each lot they would like, for example 100 Mini lots, or 12 Standard lots.
What are the pros and cons of forex?
For those who want to be involved in trading, Forex is sometimes viewed as an easy choice, as entry costs are low, regulation is minimal to get started, and it offers 24/7 access and trading. However, currency trading moves very fast, and in our modern digital ecosystem, many players will have sophisticated software working on their behalf that understands price fluctuations more than can be achieved with the human eye.
Aside from its status as a traded commodity, FX has some very real world business applications when it comes to global workforces and international payments. In this context, currency is a parameter global companies need to consider with great depth, as global payroll and any other payments in different countries needs to be done in the local coin.
This can be a remarkably complicated process, in terms of juggling the fluctuating values of multiple currencies and staying on top of regulation and compliance in each country. That’s why partnering with an experienced payment execution platform with built-in Forex and regulatory capabilities is a smart investment for any organization with an expanding global workforce that works with multiple currencies around the world.