Forex (foreign exchange market or currency market) is a young and developing market of currency exchange, whose daily turnover exceeds all the financial markets of the world. According to the Bank for International Settlements, daily turnover reached the level of 4 trillion USD in 2010, compared with the daily turnover of American stock exchanges, which is “only” 300 billion USD.
All the operations carried out on the Forex market can be divided into several groups: speculative, hedging, trading and regulating.
History of Forex: How Did the Biggest Worldwide Financial Market Appear?
The market of currency exchange started its history in 1971, from the moment of gold standard cancellation. The 37th president of America, Richard Nixon, was the initiator. Because of the cancellation of the gold standard, the system of stable currency rates was destroyed. As a result of the Smithsonian agreement in December 1971, constant currency fluctuations within 4.5% (against USD) were permitted (within 9% for currency pairs that do not contain USD). The decision on principles of a new currency system was made in Kingston (Jamaica) only on January 8, 1976. All the participants-members of IMF refused to set the official price for gold and limits on changes in the currency rates. The development of the currency market starts with this decision.
All the operations carried out on the Forex market can be divided into several groups: speculative, hedging, trading and regulating.
Unlike stocks, Forex is an over-the-counter (OTC) market, that does not have one specific place for trading and set working hours. That is because the main volume of all the transactions occurs between major world banks. As all the banks are situated in different places all around the planet, operations are carried out 24 hours a day (except during bank holidays).
Forex Participants – Who Rules the Market?
So, major participants of the Forex market are banks of the world (commercial and central ones). However, large corporations, that are engaged in foreign economic activity, investment and hedge funds, brokerage firms, dealing centres, and individuals participate in this process as well.
Commercial Banks
Commercial banks carry the main volume of trading. They are involved in taking deposits from individuals and legal entities and operating according to their goals with subsequent return of money to the owners.
Central Banks
The main aim of central banks is to provide financial services to the government and commercial banks of their countries.
Their main functions are:
- money supply and exchange rate regulation;
- control of the release of national currency’s notes;
- lending and accepting deposits from commercial banks, as well as control of their activity;
- management of the country’s debt;
- maintenance of the gold currency reserves of the country;
- interaction with other central banks.
You can learn more information about central banks and their functions from this article.
Forex attracts more people day after day because many people want to benefit from rate fluctuations.
Large Corporations
Large corporations, engaged in foreign economic activity, use Forex to exchange national currency into foreign currency and to forward, conduct short-term deposits, and hedge their future deals. These companies use the services of commercial banks because they do not have direct access to the currency exchange market.
Investment and Hedge Funds
Companies that carry foreign assets invest and place the investor’s funds into different securities as well.
Forex Companies (Brokers and Dealing Centers)
They are agents that bring buyers and sellers together to carry out conversion transactions. They charge for their work either by adding a spread or taking commission fee for a lot traded.
Individuals
Individuals are those who are involved in non-commercial operations of currency exchange, for example, money transfers, currency exchange while visiting foreign countries, etc. Individuals got the chance to use Forex in speculative purposes only in 1986. Individuals may conduct speculative operations via Forex companies.
Forex attracts more people day after day because many people want to benefit from rate fluctuations. However, before you start working, you must receive basic knowledge that will help you in this work.
We hope that this article has helped you get a general idea of the Forex market. Now, you can read other Forex articles, FAQ to deepen your understanding of the foreign exchange market.
