Sunday, April 14

What Is the Forex Market? Let’s Find Out!

First and foremost, the foreign exchange market (forex or FX) is a global decentralized or over-the-counter (OTC) for the trading of currencies.  

It (OTC) refers to the process of how securities are traded via a broker-dealer network as opposed to on a centralized exchange. One important fact: OTC trading can involve equities, debt instruments as well as derivatives, which are financial contracts that obtain their value from an underlying asset such as a commodity.

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In certain cases, securities might not fulfill the requirements to have a listing on a standard market exchange. Instead, they can be traded over-the-counter.

Nevertheless, OTC trading can include equities that are listed on exchanges and stocks that are not listed. Interestingly, stocks that aren’t listed on an exchange, and trade via OTC, are typically called over-the-counter equity securities, or OTC equities.

Stocks that trade via OTC are usually smaller companies that can’t satisfy the exchange listing requirements of formal exchanges. Still, many other types of securities also trade here. Stocks that trade on stock exchanges are called listed stocks, whereas stocks that trade via over-the-counter are called unlisted stocks.

It is noteworthy that trade transactions can take place through OTC Markets Group’s electronic matching platforms: the OTCQX, OTCQB, and the Pink Open Market.

Each of the above-mentioned platforms contains a progressively lower (i.e., riskier) tier of companies’ stocks. Stocks in the highest-tier OTCQX must satisfy various eligibility criteria and contain shares of several foreign ADRs. The lowest tier is the Pink Open Market, which has far less rigorous listing criteria and quality control.

Forex market and its importance

Currencies play an important role as they allow us to purchase goods and services locally and across borders. Moreover, international currencies need to be exchanged to conduct foreign trade and business.

For example, if you are living in the United States or the United Kingdom and want to buy cheese from France, then either you personally or the company from which you buy the cheese has to pay the French company for the cheese in euros (EUR). This means that the U.S.-based importer would have to exchange the equivalent value of U.S. dollars (USD) for euros.

Let’s imagine that you are a tourist from France. You can’t pay in euros in Egypt to see the pyramids because it’s not the locally accepted currency. You have to exchange the euros for the local currency, in this case, the Egyptian pound, at the current exchange rate.

The forex market is very interesting. For instance, one unique aspect of the forex market is that there is no such thing as a central marketplace when it comes to foreign exchange. Instead, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions take place via computer networks among traders around the globe rather than on one centralized exchange. 

Also, the forex market is open 24 hours a day, five and a half days a week. Furthermore, currencies are traded worldwide in the major financial centers of Frankfurt, London, Singapore, Hong Kong, New York, Paris, Sydney, Tokyo, as well as Zurich—across almost every time zone. 

As a result, when the U.S. trading day ends, the forex market begins anew in Hong Kong and Tokyo. Consequently, the forex market can be extremely active anytime, with price quotes changing all the time.