Lesson: Indian FOREX market
Forex market in India is going to up and this article, which tries to illustrate in a very simple way the definition of Forex, what the Forex market is and how it works, would be incomplete without reviewing the most popular assets that are available to any Forex Trader. Buy gold using forex trading and the gold price in INR is 4600 in Bangalore.
We speak of a decentralized world market, without a physical headquarters, which has grown considerably with the widespread use of the internet, allowing brokers, banks, and even individuals to have access to this form of trading. Currently, in terms of turnover, it is the largest market in the world, moving around 6.6 trillion dollars a day, according to the latest report from BIS - Bank for International Settlements.
The main investors and participants in this market are large international banks, including central banks, financial institutions such as insurance companies and credit institutions, speculators, commercial and private corporations. The Forex Market is divided by access levels, determined by the amount of money that investors are trading, so the interbank market is responsible for more than 50% of all transactions. Today Cryptocurrencies are on trending due to no transaction fees, or low cost in exchange.
How the Forex Market Works
If you have already exchanged money, you certainly know that the value is variable and that if you exchange money in one day you can “lose money” compared to the previous day. For example, if today the euro is worth 0.85 pounds, and you buy a thousand pounds, you will pay 1,176.47 euros. A week from now, if the euro appreciated and was worth £0.90, for example, you would pay £ 1,109.02 per thousand pounds, that is, you had a loss of € 67.45 in one week. Imagine this scenario with high values. The oil market is in trouble and oil rates are very low due to low consumption.
Simply put, this is what the Forex Market is based on, a foreign exchange transaction system. Forex currency pairs are traded. For example, EUR / USD or EUR / GBP. The value of these pairs is determined by several factors that you need to be aware of if you are going to buy or sell.
If you believe, for example, that the euro is going to appreciate against the dollar, you should buy a EUR / USD pair. If the outlook is for the dollar to appreciate against the euro, it should choose to sell.
In the first case, it is in the so-called long position, that is, it wants to buy euros and sell dollars, which is the secondary currency. In the second case, and since you want to sell the base currency (the euro), you are in a selling position.
Whoever invests in Forex seeks to make money from these fluctuations, that is, they will receive according to the differences in valuation of the currencies in which they invest.
Another difference between the Forex market and other investments is the timing. When the market closes in New York it is opening in Sydney, which means that this market is almost always open, open 24 hours a day, except on weekends.
If, on the one hand, this allows a quick response from investors, on the other hand, it implies extra attention since market conditions can change very quickly.
Central bank decisions, political, social and economic events, reports from economic or social entities (such as the OECD or the IMF) influence the value of currencies and sometimes in a quick and unpredictable way. Therefore, this is a complex investment.
Who can invest in the Forex Market?
Theoretically, anyone can invest, not least because it is not necessary for the investor to have the full amount involved in the operation available. This does not mean that you can make money without investing, or that you don't have to meet certain requirements.
The first is to have an account opened with a financial intermediary and the latter must be authorized by the Securities Market Commission (CMVM) to provide this type of service. If you have doubts, you can consult the list of authorized entities on the CMVM website, as well as alerts on unauthorized financial intermediation.
Obviously, intermediaries charge commissions, and considering the complexity of the market, it is important to choose an entity with a good reputation and that can advise on investments.
The Forex market involves large financial institutions and large private investors, so if you really want to enter this world, you need to know the rules and the risks.
High liquidity and the fact that it is an “over-the-counter” (OTC) market, that is, over the counter, often appear as attractive factors. However, OTC markets do not have the same level of transparency as markets. regulated, so the risk increases.
The OTC market, or over-the-counter market
In OTC markets, the level of transparency is lower than that of regulated markets, so the risk is greater.
In Portugal, there are only three regulated markets registered with the CMVM: Euronext Lisbon, the Futures and Options Market, and the OMIP derivatives market.
Thus, any derivative contract transaction not carried out in these three markets is considered an OTC market transaction and is not subject to the transparency rules of the other markets.
The main risks
For all these reasons, investing in the Forex Market is not advisable for any type of investor. Those who have a more conservative profile and do not like to take risks are unlikely to choose this type of investment.
The CMVM, in its recommendations on complex financial products, warns of some risks related to this market.
Among the financial risks is that of total or partial loss of the capital invested, the fact that the remuneration is not guaranteed and the risks associated with exchange rates, which, as already mentioned, are dependent on a series of factors that cannot be controlled by the investor. In addition, these rates can undergo sudden changes, which do not always allow for a timely reaction.
If it is true that positive returns can be multiplied, the same applies to losses, and in exactly the same proportion, so it is not advisable to invest everything at once.
One of the great dangers is the so-called leverage, that is, the way that financial intermediaries allow to multiply the money invested even if the investor does not have that capital.
Let's look at an example given by Deco. Imagine that a financial intermediary indicates a 100: 1 ratio. This means that you can leverage 100 times your capital and that with an investment of 1,000 euros you can be exposed to a position of 100,000 euros.
If you traded a EUR / USD lot at 1.0560, this meant that you would be buying 100,000 euros and selling $ 105,600. At the end of the day, he closed his position at 1.0660, which would allow him to win 1,000 dollars or 938 euros. However, if you were investing with a 100: 1 ratio, and with a required margin of just $ 1,000, you could almost double that margin.
However, if the euro had not appreciated against the dollar and had lost in the same proportion, it would have lost almost all of its capital. In extreme situations, it is possible that the loss is greater than the capital invested, warns Deco.
So you can choose to invest without leverage, using the 1: 1 ratio. So you only invest what you have and, although you earn less, you will also have fewer impact losses.
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