The foreign exchange market also known as forex or FX market is a worldwide over the counter or decentralized market which majors in the exchange of currencies. The market basically dictates the forex rates for every currency. It does not only include buying but also selling currencies at the present or determined rate.
Features of forex market
Foreign exchange market is very unique and this is based on the following features:
- The market has geographical dispersion. It is available all around the world.
- The trading volume on the market is quite high and this is no surprise as it is the largest market in the world. This majorly indicates that it has high liquidity.
- The market is available the entire 24 hours each day with exceptions for weekends.
- The market has a low margin of profit in a relative sense compared to other markets characterized with fixed incomes.
- The market has a huge number of factors that affect the exchange rate.
- The market makes use of leverage to improve profit and life margins and this is done with consideration of account size.
Size of forex market
The Forex market is the most liquid market around the globe and it features governments, institutional investors, currency speculators, financial institutions, commercial banks, central banks, commercial corporations and private individuals.
The average turnover of the market for a day increased by a large margin;from $1.9 trillion in 2004 to about $6.6 trillion in 2019. The increase in turnover is based on a lot of factors such as the improved trading activity of high frequency traders; increasing importance of forex as an asset class; sprouting of retail investors as a vital market section; the increase in electronic execution of trade; improved market liquidity; andvast choice of execution venues or platforms which has decreased transaction rate. Some of these factors have in one way or the other contributed to the increased participation which has notably improved trading turnover.
Interestingly, the market is basically a decentralized market where brokers negotiate one on one with one another on the price of the currency rate; hence there’s no central exchange where a sole individual or corporation benefits more from the trades made.
The $6.6 trillion analysis broken down below:
- $3.2 trillion from forex swaps.
- $2 trillion from spot transactions or exchanges.
- $1 trillion from outright forwards.
- $294 billion from options and other items.
- $108 billion from currency swaps.
The hugest geographical trading center for the market is dominantly in the United Kingdom, therefore, a specific currency quoted price is generally stated in London market price. This is not surprising as the UK is responsible for about 43.1 percent if the total trades on the market.
Forex has proven itself as being highly available to the world and can be assessed from anywhere around the globe. The easy accessibility of the market has had a notable impact the on the growth of the market as many retail investors are increasingly participating in the market. The retail investors participate via brokers such as South African Forex brokers.