In recent years, due to the increasing risk of stock market, many investors have begun to switch to the foreign exchange market. As we know, the foreign exchange market refers to the trading market where financial institutions such as banks, brokers and dealers and international enterprises trade various kinds of currencies through agencies or telecommunication systems. It can be tangible or intangible. Therefore, when trading in the forex market, you must understand these 10 things clearly.
1. What is the forex market?
The foreign exchange market refers to the trading market where financial institutions such as banks, brokers and dealers and international enterprises trade various kinds of currencies through agencies or telecommunication systems. It can be tangible—such as a foreign exchange office; or intangible—such as interbank foreign exchange speculation through telecommunication systems. According to the latest statistics from the Bank for International Settlements, the average transaction volume of the international foreign exchange market every day is approximately US $ 6 trillion, and the highest daily transaction volume in 2019 has exceeded US $ 11 trillion.
2. Who are the main participants?
The participants in the foreign exchange market mainly include central banks, commercial banks, non-bank financial institutions, brokerage companies, self-employed merchants and large multinational corporations in various countries. They trade frequently with huge amount of transaction, often ranging from several millions to tens of millions of dollars per transaction. According to the purposes of their transactions, participants in foreign exchange speculation can be divided into investors and speculators.
3. How does the forex market come into being?
International economic and trade ties are indispensable to any country in the world under the current world economy. With the international flow of commodity, labor and capital, movements of money across borders for payment are inevitable. International economic exchanges lead to the supply and demand for foreign exchange, which then leads to foreign exchange speculation. And the places engaged in foreign exchange speculation are called foreign exchange markets. With the continuous strengthening of the global integration of the world economy, the international foreign exchange market has become increasingly closely linked. (Follow: What types of stocks will outperform?)
4. What are the main forex markets around the world?
At present, there are more than 30 major foreign exchange markets in the world, located in different countries and regions on all continents. According to the traditional geographical division, there are mainly three parts: Asia Pacific, Europe, and North America. Among them, the most important are London, Frankfurt, Zurich, and Paris in Europe; New York and Los Angeles in North America; Sydney, Tokyo, Singapore and Hong Kong in Asia Pacific area.
Though each market has its intrinsic and unique characteristics, all of them share some similar features. Separated by distance and time zones, they influence each other sensitively but remain independent of each other. Once a market closes, it passes orders to another center, sometimes setting the tone for the opening of the next market. These foreign exchange markets are centered on their cities and radiate to other countries and regions around them. Due to different time zones, each foreign exchange market opens and closes during business hours. They are connected to each other through advanced communication equipment and computer networks, so that market participants around the world can trade. The flow of foreign exchange funds is smooth, and the differences of exchange rates between markets are extremely small, forming a unified international foreign exchange market that operates globally around the clock.
5. Which is the biggest forex market in Asia?
Tokyo is the largest foreign exchange speculation center in Asia. Before the 1960s, there was strict financial control in Japan. Until 1964, Japan joined the International Monetary Fund, the yen could be exchanged freely and the Tokyo foreign exchange market began to take shape. After the 1980s, with the rapid development of the Japanese economy and the gradual rise of its position in international trading system, the Tokyo foreign exchange market has also gradually grown.
Since the 1990s, due to the collapse of economic bubbles in Japan, trading in the Tokyo foreign exchange market has been in the period of downturn. Trading on the Tokyo foreign exchange market is dominated by the US dollar against the Japanese yen. Japan is a big trading country, and the trade demand of importers and exporters has a greater impact on exchange rate fluctuations in the Tokyo foreign exchange market. As the exchange rate changes are closely related to the state of Japan's trade, the Japanese Central Bank pays close attention to the fluctuation of the US dollar against the Japanese yen and frequently intervenes in the foreign exchange market. This is an important feature of the Tokyo foreign exchange market.
6. Where is the biggest forex speculation center in the world?
In London. As the oldest international financial center in the world, London is among the earliest cities in the world to form and develop its forex market. Before the First World War, the London foreign exchange market had begun to take shape. In October 1979, the UK completely lifted foreign exchange controls, and the London foreign exchange market developed rapidly. There are about 600 banks gathered in the City of London, and almost all major international banks have branches here, which has greatly stimulated transactions in the London market. Due to London's unique geographical location, it is located at the intersection of two major time zones, connecting the Asian and North American markets. London is just opening when Asia is close to closing, and New York is just the beginning of a working day when it closes. Investing in unusual activities, London has become the world's largest foreign exchange speculation center, which has an important impact on the overall foreign exchange market trend.
7. Where is the most active forex market in North America?
In New York. As the US dollar became a worldwide reserve and clearing currency after the Second World War, New York became the clearing center of the US dollar worldwide. The New York foreign exchange market has rapidly developed into a fully-open market and the second largest foreign exchange speculation center in the world. At present, more than 90% of the world's US dollar payments are made through New York's "interbank clearing system". Therefore, the New York foreign exchange market has functions of US dollar clearing and transfer that cannot be replaced by other foreign exchange markets, and its position is increasingly consolidated. At the same time, the importance of the New York foreign exchange market is also reflected in its important influence on the exchange rate trend. The fierce process of exchange rate changes in the New York market is worse than that in the London market. The main reasons are as follows: The economic situation in the United States has a significant impact on the world; various financial markets in the United States are developed, and the stock market and bond market Exchange and exchange markets interact and are interconnected; speculative forces dominated by U.S. investment funds are very active, fueling exchange rate fluctuations. Therefore, the exchange rate changes in the New York market have received special attention from foreign speculators around the world.
8. Why is the bank buying rate lower than the selling rate?
The bank buying rate is the price at which the bank buys the basic currency. The bank selling rate is the price at which the bank sells the basic currency. The difference between the two represents the bank's return on risk. Frequently traded currencies such as the Euro, Japanese Yen, British Pound and Swiss Franc usually have lower price gap, whereas some less-frequently traded currencies may have bigger gap between buying and selling rates.
9. How may exchange quotations are there in the international forex market?
Often there are two, direct quotation and indirect quotation.
10. What is the direct quotation?
Direct quotation is also called price quotation, for which the exchange rate is expressed in units of domestic currency price of foreign currencies. Usually it shows the amount of local currency to the equivalent of 1 or 100 units of foreign currency. The less amount of local currency, the more valuable the currency is and vice versa. In the direct quotation, the trend of foreign exchange rate has a negative correlation with the domestic currency. When the domestic currency rises, the exchange rate falls, and when the domestic currency depreciates, the rate rises. This quotation is adopted by most countries in the world and is the most common way to quote exchange rate on the market, for example, USD/JPY, USD/HKD, USD/RMB and etc.
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