Miscellany: Currency Market

Anyone who religiously read financial daily or glued to the business channel must be aware of US dollar appreciating against major currency. What does that mean to a common investor and how he can benefit from it? As days pass by, more and more people are getting attracted towards the financial world. There seems to be an increasing awareness among the common people regarding trading and various products of the trading world. Nonetheless, there is very little awareness about the currency trade and how it functions. To help our readers gain better knowledge, DSIJ gives you a detailed synopsis about Currency Exchange, how transactions are carried forward, and how is it beneficial to an individual.

Let us first understand what a currency exchange is. Currency Exchange is basically a platform that allows customers to exchange one currency for another currency. A currency exchange may be a stand-alone business or may be part of the services offered by a bank or other financial institution. The currency exchange profits from its services either through adjusting the exchange rate or through taking a commission. The exchange rate that a currency exchange quotes is typically close to the spot rate, although the exchange will adjust this rate somewhat to ensure that it makes a profit on the transaction. Because the transaction is not conducted at the spot rate, and depending on the profit that the exchange wants to make, consumers may find that it is less expensive to incur ATM or credit card fees at the foreign destination, rather than use exchange services ahead of time.

Why is Foreign Currency Required?

Foreign Currency is largely required for the purpose of foreign currency trading and secondly, travelling to international destinations. Trading in foreign currency is now attracting a lot of interest from the general public. In the age of social networking, with everything going social, trading in foreign currency has become a lot easier. One perk of currency exchange trading is that when the economy at home is going south, an investor can easily benefit from the downward trajectory.

What are the benefits of foreign exchange trading?

The forex market is one of the biggest financial markets in the world. In India, the forex market came into existence only after the launch of currency futures in August 2008. Forex offers the opportunity to profit in both rising and declining markets because with each trade, you are buying and selling simultaneously, and short-selling is, therefore, inherent in every transaction. Forex is a 24-hour market. In addition, since the forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position - as they are in the equities market. Market watchers say that BSE is taking leadership in many segments due to extremely fast technology with 200 microseconds response time and very low cost. BSE transaction speed is considered more than 10 times faster than rival NSE and the cost of transactions on currency derivatives is 99% lower than NSE attracting people to trade on BSE.

Currency prices are based on objective considerations of supply and demand and cannot be manipulated easily because the size of the market does not allow even the largest players, such as central banks, to move prices at will. Trading in currency derivatives also requires relatively lower capital as you need to pay a small premium or deposit a margin of 3-5 per cent of contract value. Furthermore, commissions in the equities market are much higher than in the forex market. Traditional brokers ask for commission fees on top of the spread, plus the fees that have to be paid to the exchange. Spot forex brokers take only the spread as their fee for the transaction.

However, investing in foreign exchange requires as much homework as any other investment. We advise you to do your homework well before investing as there is no guarantee on gaining or losing. Happy Investing!