The forex market involves trade in currencies of different countries. Referred to as forex generally, most people do not realise that this trade has specific restrictions in specific countries. Individuals are generally not allowed to trade in this market, since it is restricted to governments, authorised financial institutions, and authorised banks and authorised dealers. Every country has its own rule on who can operate in the foreign exchange market.

In today’s more open world, and increased flexibility now being found in most countries regarding investments and trade, forex markets too have emerged as a source of income for most governments, authorised traders, and authorised banks.

The key word here is authorised. Only authorised agents, be they firms, financial institutions or banks, or dealers, they have to be authorised either by the Central Bank of their country or by a law which permits them to trade. In some countries individuals are barred.

Since foreign exchange markets operate on demand and supply of currencies, and the result is always in cash, it is an attractive and lucrative market. And as an individual you may succumb to the temptation of trying your hand at it. First and foremost you must know whether as an individual are you allowed by your country to trade in the forex market? Don’t get taken in by ads which say you are. Check with you Bank or a known financial institution. Seek specific details. Generally, you may be authorised provided if you fill in a particular form and submit it to a designated authority. If you don’t have that piece of paper, well you may well be penalised quite heavily! That’s one scam that’s doing the rounds. You need to check it out.

Why trade in foreign currency? Let’s imagine you are going to another country. When you reach there, you have the option to pay in international currency, say the dollar, or in local currency. If the dollar is strong, i.e. it gets you dollar x + 10 local currency, it makes obvious sense to convert the dollar to the local currency since it gives you more value. However, do note that exchanging currency carries a fee, and you have to factor in that.

When you are returning, the local currency, unless it is a prominent country, you may wish to convert it back to your own currency; here too, you will have to pay a fee, and you will receive less – remember that when you converted in that country you got more; when returning to your own country, the value goes down!

That’s what makes the foreign currency markets tick. The value of a currency was earlier linked to the gold reserves. Later in the early 70s of the last decade, it moved to a more liberalised system which was based on the economy of each country, and how much trade deficit (exports minus imports) and how much was GDP growth (Gross Domestic Product) was, inflation rates, and so on. Obviously, countries short of an ‘x’ currency to pay for its imports had to find that currency in the market, and it would pay a commission to buy that currency to pay for its imports. This goes on throughout the day and night, throughout the year.

Since the sums traded are huge, running into trillions of dollars, the arbitrage opportunity is calculated even up to the 8th digit i.e. say one dollar is equal to 1.45678432 pounds sterling. A change in the last digit of 2 meant that when you are dealing with trillion dollars, you can imagine the amount it would lead to. These calculations and algorithms are best left to those who know their stuff – the economists and analysts. And they command a fancy price, because of their expertise, and you will find them in governments, financial institutions, and in banks, and with authorised dealers.

You won’t see them on the roadside, or even broadcasting their services, unless they are authorised. it’s best if you want to invest safely, and avoid the scams, then you better check with your banker, who knows best. Yes, there are a number of financial institutions that now offer foreign exchange linked bonds and stocks; check that they are authorised. See the proof for yourself. if they are in order, go ahead. There are many pitfalls.

In dealing with foreign currencies, no matter what one reads, it takes time for money to really flow in. Short term dealing does not help. Long term is the route to take. And always keep score of what is happening.

The moral of this story is play safe, check the credentials with someone who knows how, and that is generally your banker, and simply avoid the scamsters. Banks and financial institutions are conservative because they are dealing with other people’s money, and they know best. They can hire the talent, and they do. Take their advice alone.

Forget the rest.

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Author: Abhishek Agarwal
Article Source: EzineArticles.com
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