The Forex Market is a busy place where traders and investors meet to deal and execute, buy and sell, and to bet and hope for wins. However, despite this complex and seemingly overwhelming industry, it is actually something that affects even the most disinterested person. Even without transacting or having anything to do with the forex market, everyone is affected by what happens there. By simply purchasing goods or travelling overseas or saving money in the bank, you are inadvertently participating in the market.
Here, we will be presenting concepts of the Forex Market that both traders and the normal citizen needs to know if they want to understand their money and the economy they belong in better.
The Eight Major Currencies
What separates the stock market form the forex market is the focus. In the stock market, there are thousands of companies and stocks to choose from. Not only that, there are also a numerous markets across the globe: the New York Stock Exchange (NYSE), the NASDAQ in the US, the BM&F Bovespa of Brazil, the Shanghai Stock Exchange, the London Stock Exchange, Deutsche Börse of Germany, the Bombay Stock Exchange, and a whole bunch more. You’ll get your head twisted and confused with the volume of possibilities in the stock market.
Meanwhile, in the forex market, you only have to watch out for the eight major currencies: the US dollar (United States), the euro (Eurozone: Germany, France, Italy, and Spain), the yen (Japan), the pound (United Kingdom), the Swiss franc (Switzerland), the Canadian dollar (Canada), the Australian dollar (Australia), and the New Zealand dollar (New Zealand). By keeping track of these eight major currencies, you are already monitoring the general status of the world’s economy. The reason for this is because the countries where these currencies reside are movers of the world. What happens in their economy will always have an effect on the rest of the world.
To keep track of the major currencies, simply look on financial websites. Economic data, currency performance, and news events are available to anyone. Traders and investors can use it in their trades and investments while the average citizen can use it to be in the know.
The Inconsistent Interest Rates
Interest rates are controlled by the central banks of the respective countries. They are adjusted according to the state of the country. This is used to help in inflation and controlling prices of goods. For market participants, it is crucial to know whether interest rates will go up or down because it will have significant effect on the assets and other financial instruments.
Interest rates are adjusted depending on the country’s economic health. In general, countries whose performance is characterized by rapid growth is likely vulnerable to hiking inflation. To help control such growth, interest rates may be raised. Meanwhile, if a country looks like it’s on a downhill path with recession looming and growth slowing down will have their interest rates lowered. Reducing interest rates will help in boosting the economy.
The Dangers of Leverage
The idea of leveraging is very popular in the forex market. Leverage is basically borrowing capital to make an investment. This means that you have a greater potential for profiting. At the same time, you have the potential to lose bigger. Markets offer leverage of as much as 100:1. This means that you can manage $10,000 of assets using $100 as capital. The risk may seem tremendous but the forex market has a solution for these. Stop orders and limit orders exist to cap off big losses. They are automated transactions that make sure you do not lose what you can’t afford. They are available 24 hours a day, five days a week. In short, your account will never go negative.
There are more concepts that need to be learned in the forex market. However, you have to make sure first that you have a solid grasp of the basics.