There are certain investment markets that command tremendous amounts of activity all around the world. Stocks, commodities, real estate, and, these days, even cryptocurrency are all fitting examples. Standing atop all of these trading environments, however, is the forex (or foreign exchange) market. Known to be the most active trading space in the world, the forex market is said to facilitate more than 6 trillion USD in monetary transfers each and every day. Recent estimates suggest that there are more than 10 million active daily traders at any given time, and more than 1 million of those are believed to be operating in India.
That estimate makes clear that the forex market has become extraordinarily important to the investment community throughout India. So, in this post, we will examine what it’s important to know about the forex market, as well as how Indians who are interested can get started, both technically and strategically.
What Exactly is the Forex Market?
By definition, the forex market is a global exchange on which individuals, banks, and other institutions are able to buy and sell different currencies. The fundamental concept is actually quite simple: If you buy one currency with another, and the one you bought gains value, you can profit – either by capitalizing on that value or by selling it back for more of the original currency. For example, at the time of this writing, 1 INR is equal to 0.012 USD; you could exchange 1,000 INR for 12 USD. If the dollar then gained value against the rupee, however – say, such that 1 INR was equal to 0.01 USD – your investment would have gained value. You could, in theory, exchange your 12 USD back for 1,200 INR after starting with just 1,000 INR.
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As for how the forex market operates, there are two primary ways of making trades. One is by trading actual currency at designated points of exchange. In India, these points of exchange exist in banks regulated by the RBI, at private exchanges with official, government-issued licenses, and at airports.
The more common option, however, is to conduct forex transactions electronically. This is important for Indian investors to take note of because it separates the foreign exchange market from some of the most popular forms of investment in the country. Traditionally, Indians tend to favour financial opportunities with physical components; the real estate market has long been a hub of investment activity in India, for instance, as has the trade of gold and other precious commodities. But, while it is possible to trade currency in physical form, this is a market that, for all intents and purposes, has “gone digital.” This brings us to the question of how Indian consumers who are intrigued by the forex market can get started with trading.
How to Start Trading Forex
Once again, those who strongly prefer dealing with physical assets have the option of going to in-person exchange points to conduct forex trades. By and large, though, those 1-million-plus currency investors operating throughout India have instead learned to trade forex online through a number of convenient and reliable platforms. Most of these now exist in mobile form, meaning that accessing a foreign exchange trading account is as simple as opening an app on a smartphone.
With a legitimate, reputable forex trading app, investors can immediately gain access to a number of features that not only facilitate but also simplify the trading process. First and foremost, these apps allow for active trading; you can buy and sell currencies using your chosen mobile forex broker, as well as hold your positions over time. All of this can be done based on the most up-to-date prices, as well as with virtually instantaneous transactions.
Beyond basic trading, however, a high-quality forex app will also help with analysis and calculation. It will show the history of currencies’ relationships to one another; it will display important news updates from relevant sources, and it will set up alerts that can make it easier to stay on top of price movements. These apps won’t trade or run accounts for you, but they do provide tools that make the market more manageable.
That covers how to start in the forex trade from a technical perspective. Really, it’s about finding the right app or platform, setting up an account, and learning how to take advantage of the included functions and tools. Beyond knowing how to get started technically, however, traders must also consider how to get started from a strategic perspective.
It is important to note that each investor has unique needs. What works well for one may not work well for another. Similarly, each trader has their own set of financial goals. With that said, there are certain fundamental concepts that are important to understand early on, as they will inform any comprehensive forex investment effort.
Understanding Pairs
Currencies are traded in pairs, such that one is always bought at the price of the other. Currency pairs are listed with the “base” currency first and the “quote” or “counter” currency second. To buy a pair means to acquire the base currency at the current rate of the quote currency.
As an example, consider how you might trade the rupee against the dollar. Recently, the rupee hit a low, at which it was worth 83.32 USD. A currency pair would show this as USD/INR with a value of 83.32. This means it will cost you 83.32 INR to purchase each 1 USD; an order might be submitted, for instance, for 100 USD at an investment of 8,332 INR. This is merely one example based on recent real-world values, but it illustrates what it means to buy a currency pair and how you can invest in one currency with another.
Around the world, there are countless currency pairs traded on forex markets. Within India, however, only a handful of currency pairs are commonly made available to investors. Four of these pairs involve Indian currency. These are USD/INR, pitting the rupee against the dollar; EUR/INR, pairing the rupee with the euro; GBP/INR, pairing the rupee with the British pound; and JPY/INR, pairing the rupee with the Japanese yen. Beyond these four, Indians are also able to trade the pairings of USD/JPY, GBP/USD, and EUR/USD.
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Understanding Leverage
In addition to understanding currency pairs, it is crucial for new forex investors to have a grasp of the concept of leverage. This is not a concept that is unique to the forex market, but it is perhaps more closely associated with the currency trade than with any other form of investment. It is also among the reasons that forex trading is so popular around the world.
The basic idea of leverage is to borrow money from a broker to increase the size of an investment. When making a leveraged trade, you submit a deposit that is only a percentage of the funds you want to invest. For example, if you wanted to invest 100,000 INR but did so with a leveraged arrangement requiring only a 10% margin, you would only need to invest 10,000 INR to back the trade. If the value of the rupee increased from this point, your profit would still be in proportion to the 100,000 INR total of the investment, even though you would only have put up 10,000 INR. The downside is that if the value goes down , you can owe an amount greater than your original buy-in.
Clearly, there are two sides to leverage. Nevertheless, it is important to understand as a method many forex traders use to maximise profit potential.
Conclusion
Indian consumers have a lot of different options when it comes to personal investment. As stated, many have long preferred to buy into physical assets, from precious metals to real estate properties. Others choose to take advantage of online platforms facilitating investment in foreign stock markets. And more still take more conservative approaches, buying into mutual funds or setting up savings accounts they feel they can trust for gradual, long-term gain and stability.
With the forex trade continuing to boom around the world, however, it is another market that more active Indian investors may want to look into. Effective currency trading requires some education, as well as a more hands-on approach than some other markets. That said, it can be an effective way to diversify a portfolio and invest for the future.
Hi, I’m Dev Kirtonia, Founder & CEO of Dev Library. A website that provides all SCERT, NCERT 3 to 12, and BA, B.com, B.Sc, and Computer Science with Post Graduate Notes & Suggestions, Novel, eBooks, Biography, Quotes, Study Materials, and more.