The currency market (also known as the foreign exchange market) is a one-stop marketplace
where different currencies can be bought and sold by various participants operating
in diverse jurisdictions around the globe. This market plays a very pivotal role
in the conduct of international trade and the financial sector. It serves companies
and individuals by enabling them to purchase and sell goods and services denominated
in foreign currencies and the smooth flow of capital. The currency markets operate
relentlessly and have major participants such as large international banks, corporations,
government entities, retail participants, etc.
Benefits of trading in Currency Market:
Lower margin requirements - Unlike equity markets, Currency trading allows
you to buy and sell by keeping only a small percentage of the position. This allows
the traders to achieve the optimum rate of return on their deployed capital.
Arbitrage - The currencies are traded on exchanges like NSE and BSE in India.
The traders can benefit from the inefficiencies in the price from buying low to
selling high on different exchanges.
High Liquidity - One of the most important criteria to run a business is
enough liquidity, which means to convert the asset into cash. Currency trading is
the largest market in terms of volume turnover in the world. One can speedily enter
and exit huge positions with a single click.
Hedging - The process to protect your existing investment portfolio against
future unforeseen losses. This is usually practiced by residents to protect their
offshore investments and NRIs to hedge their domestic portfolio. It is also adopted
by importers and exporter to limit their losses owing to currency rate fluctuation.
Speculation - To gain from the highs and lows of the currency exchange rates,
a trader must know the possible direction. For example, there is a possibility of
USD appreciation with crude oil price rises; the trader would buy USD/INR future.
Similarly, if there is a possibility of INR appreciation, they would short sell
USD/INR futures to make a profit from the movement.
Lower entry barrier - The introduction of the derivative product in the last
few years has opened the door of forex trading to the retail traders. With a small
capital also, it is possible to make a mark with the correct strategy.