Why Forex is the most traded market in the world
The finance world is filled with a lot of jargon and loose terminology. It’s not the easiest thing in the world to understand, but if you break it down into its most minor parts, you’ll be able to make your way through it. If you want to be successful in this industry, one of the first things you need to learn about is what forex is – and why it’s so important. What is Forex? Typically, when you hear the word “forex”, you think of currency trading – and that’s an excellent thing. The reason is that forex is the most versatile of all trades. In fact, as a small business owner and entrepreneur, you may be trading in several different currencies every day. After all, there are only 24 major currencies – and they have to exist within the context of the global economy. This means that we’re always in need of forex. For example, let’s say that you buy a TV from Best Buy and pay for it by credit card. You then go out and buy yourself a $1,000 television to put in your office. You have more money in your account than the amount of money required to make the purchase – so you go and deposit the rest of it into your bank account. Because you paid for the TV through credit, Best Buy owes you an amount of money on your end. That payment is going to be made in pounds. The only way for Best Buy to get that money into your bank is by discussing it with their international affiliates and exchanging it into dollars. They’re going to charge you a fee for that, but most companies accept the fact that forex trading is part of doing business these days. More than one billion people trade on forex every day – and even if you’re buying and selling the standard currencies, there are a lot of reasons why you should be getting involved as well. Forex has such a high daily trading volume because it is the most versatile of all trades. In fact, as a small business owner and entrepreneur, you may be trading in several different currencies every day. Who are the players that trade forex? Institutions: Large Investment Banks, Central Banks, Governments Governmental authorities and large investment banks are significant players in the forex market. At the same time, central banks are directly involved too. In particular, large institutions can make big trades as a result of their resources and financial clout. Forex trading is an integral part of the foreign exchange market. Banks and other large financial institutions use forex to manage their vast assets. The exchange rate is a proportion between two currencies denominated in different currencies. Governments can intervene in the market just like any other investor. Consumers: Individuals As Traders Individuals are also able to trade in forex on their own. This is part of what makes forex so popular worldwide – especially on the Internet, where you can trade from your home computer or mobile device. International investors in forex are split into the following categories: Direct participants, including banks, governments, dealers, and broker companies. These institutions invest in foreign exchange with their cash and make trades directly with each other or with other customers. Indirect participants, including households and companies. For these customers, a bank acts as a middleman between them and the market. Indirect participants typically cannot purchase or sell currency themselves (or at least not in large quantities) and must rely on a broker to do this for them. The bank might also hedge the risk of exchange rate movements by going short or long on its own account. How do the players use Forex? The foreign exchange market is one of the largest financial markets in the world, with more than $1.5 trillion traded daily. Large banks may trade hundreds of millions of dollars per second, but individual traders can sometimes trade as little as $1 – or even less – at any time. Investment banks use forex trading to raise capital and convert their holdings of one currency into another. They’re also able to use it as a source of income. The main reason why investment banks use forex is to generate revenue. Investment banks also act as counterparties when investment banks or other direct participants transact directly with each other. Governments use forex to manage their foreign exchange reserves. This is why the US government, for example, auctions off the right to purchase euros from its treasury department. Banks use forex to manage their assets and transactions. Banks can hedge certain risks in transactions by going long or short on the exchange rate. They also unload disproportionate assets, such as at the end of the financial year or before a big merger. Banks also use forex to earn interest on funds deposited with them (banks typically charge an administration fee on this amount). Central banks use forex to help maintain the value of their country’s currency. They end up doing it both with other central banks and on their own. Central banks also use forex to control inflation and protect currencies against wild fluctuations in exchange rates. Overseas investors use forex as a way to diversify their assets across the world. Some cheaper assets are available in other countries, such as real estate or stocks in those countries. The advantage of investing in other countries is diversifying away from volatile areas, such as commodities or emerging markets. This is especially valuable for those who see a collapse in specific markets or currency values – they can shift out of it. The huge forex market Many actors all play their part in creating this high daily trading volume, and it is difficult to calculate precisely how much of the total volume is traded. The money which is traded daily is not only money in the bank or deposits but also sales on credit. Foreign
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The effect of interest rates on Gold and Millennials
Gold prices have been on the rise since central banks started implementing low interest rates. Firstly, we need to understand what is causing the surge in gold prices before explaining how interest rates are affecting it. In the last two decades, Central Banks have been keeping global interest rates at 0-0.5%. This has helped many developing countries increase their GDP and economic growth and sparked inflation in developed economies by reducing their value through cheaper borrowing options. This cycle of cheap borrowing seems to be coming to an end with current negative US bond rates and the recent rise in gold prices. Millennials should take notice of this trend because it doesn’t end here. Gold prices will go up after an economic slowdown, leading to a massive increase in interest rates that could become more volatile than it is today. Now we know what is causing gold prices to take off, let’s find out how it will affect millennials. The primary mechanism of interest rates on the economy is through indirect effects that are usually negative. When interest rates go up, people will save more money and spend less, which leads to a decline in aggregate demand and less economic growth. This can have both positive and negative implications for our economy. Positive: This applies to developed economies with negative economic growth figures. With an increase in interest rates, people will save more money, increasing the nation’s savings rate. Hopefully, this will stop the country from accumulating more debt and help rebuild its economy through higher savings rates. Neutral: This is the average effect of interest rates on economies. The main effects of interest rates are determined by the state of its economy at a particular time, which can be affected by many factors, not just interest rates. Other factors are more influential than interest rates, for example, a falling GDP and high unemployment. Negative: The effects of higher interest rates are usually adverse on economies. For example, we have already seen this in emerging markets. Interest rates are currently at historic lows in Turkey and Brazil who have negative economic growth. This has led to fewer savings which are causing debt increases and the risk of defaulting on loans. Interest rates affect our economy in many ways, but one way that is becoming more and more apparent is through the increasing gold prices. This trend shows that interest rates will start to rise soon, and it also shows how it can affect millennials who live in developing countries such as Turkey, Brazil or India. As you can see, our economic system is coming to a point where gold prices will only continue to rise, which could potentially cause a financial crisis when interest rates increase dramatically.
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