Foreign exchange is a term used to refer to all payment methods used on the global market.
More specifically, foreign exchange refers to an asset or property right that is convertible into a foreign currency and used by multiple countries as a payment method recognized and approved by the international community.
Forex forms include:
- Foreign currency: a foreign currency or a common currency between a group of different countries in the world.
- Foreign currency payment instrument: means a payment instrument recorded in foreign currency such as a check (Cheque), bank card, promissory note, bill of exchange, Transfer, etc.
- Documents with foreign currency equivalent value: stocks, corporate bonds, government bonds.
- Gold: includes gold bullion, gold bar, gold block, state reserve gold, and gold of foreign residents.
National currency (local currency): the national currency is accepted as a foreign exchange when that currency is used in international payments, or imported or exported outside the country.
- Cryptocurrency: also known as virtual money, electronic money, and digital money. This is a guaranteed currency thanks to the processing power of a global network of computers, such as Bitcoin, Ethereum, etc.
Foreign exchange market
A foreign exchange market is a place in which people may buy, sell, trade, and use international forms of payment in return for the value of other currencies. The currency market is global and decentralized.
The goal of promoting trade activities and the need to exchange currencies across countries resulted in the development of the foreign exchange market. Major international banks function as the primary location for buyer and seller transactions in this market.
Because the forex market is much larger than the stock market, forex trading is also very liquid. If securities are restricted to trading hours and order matching periods, forex trading allows for the flexibility of entering and closing orders at any time.
What is forex trading?
Forex trading (commonly known as FOREX or FX or Spot FX) is a global market. Here takes place the exchange of foreign currency value on the international market.
Foreign exchange trading is one of the world’s most active markets, involving any transactions from one country’s currency to another, including capital transactions, current transactions, and operations involving the use or provision of foreign exchange services in any territory.
In forex trading, the currencies of different nations are exchanged with one another on a global platform, resulting in a massive trade volume that averages over $5 trillion each day. The foreign exchange market is now the largest financial market in the world as a result of this trading activity.
Types of investment in the foreign exchange market
After learning what foreign exchange is and what forex trading is, it is necessary to understand clearly the form of investment in the foreign market. There are three types of investment that investors can choose to participate in in the foreign market.
- Investment in the Forex spot market (Forex spot): is a form of direct buying/selling and receiving money at the time of sale.
- Investment in the Forex market forward (Forex forward): is a form of forward foreign exchange transaction, that is, the activity of buying/selling a certain amount of foreign currency at a certain rate, but without payment at the time of transaction which will determine execution at a future time.
- Investment in the Forex futures market: is a form of the transaction using futures contracts, in which the exchange rate and time of payment are agreed upon by two parties at a specific time.
Before deciding to invest in the foreign exchange market, investors should note the following:
- To be able to optimize profits, capital must be strictly managed, with a plan to minimize possible risks.
- Exchange rate fluctuations can be affected by economic fluctuations domestically and overseas, Economic changes can have an impact on exchange rates, thus understanding how to construct and evaluate the foreign exchange market is essential to making investments.
To invest effectively, investors need to understand the following concepts:
In the foreign exchange market, traded commodities are mainly currencies, deposits in foreign currencies, existing foreign currencies, and other types of assets that can be converted into foreign currencies.
How does the forex market function?
The mechanism of the foreign exchange market is currency pair trading, meaning that when investors buy any currency, they also sell another currency at the same time.
In the forex market, three types of currency pairs are distinguished as follows:
Major pair: pair USD with any other country’s currency (Example: USD – JPY, USD – EUR, USD – CAD, etc.). This is a currency pair with a trading rate of 80% of the total trading of the forex market and has high liquidity.
Cross pairs: except USD, pairs between other major currencies (eg NZD – CAD, EUR – JPY, etc.). Cross pairs have less liquidity than the major pair.
Other exotic pairs: pair a major currency with an emerging economy currency (Example: USD – HKD, JPY – MXN, etc.). These exotic pairs are also more volatile and less liquid than the major pair.
Transaction objects are classified into four groups:
- Governments and central banks: of major countries in the world, including the Federal Reserve (FED), Bank of England, and European Central Bank.
- Large banks: perform transactions for banks, customers, companies, government agencies, and individuals with a high net worth (eg Citibank, Deutsche Bank, Goldman Sachs, etc.).
- Forex Broker: provides access to the worldwide forex market to individuals or institutions through an online trading platform.
- Individual investors: are individuals who invest in foreign currencies for payment, travel, and foreign exchange activities to enjoy price differences.