It is worth noting that the currency exchange market is the world’s largest financial market. Traditionally, banks and financial institutions have exclusively dealt in the forex market.
However now, even retail investors have started participating in it. If you are a beginner who is keen on forex trading, you should start from the basics.
What is Forex Trading?
Forex trading involves buying one currency and selling another currency at the same time. You need to select a pair of currencies to begin with.
For example, you want to sell Indian Rupee (INR) and buy US Dollar (USD). Naturally, you would like to trade in currencies expecting that you will gain from the fluctuations in their values.
In India, if you want to trade in currencies, one of the currencies in a pair has to be INR. For example, you can trade INR-USD, INR-Euro, INR-Japanese Yen, and INR-British Pound. Let us now discuss factors that affect the value of currencies.
Factors That Impact The Value Of Currencies
1. Balance of Trade
If a country’s exports are greater than its imports, then buyers will need its currency more, which can increase the value of its currency, and vice versa.
2. Political and Economic Stability
A politically and economically stable country will provide confidence to investors. Hence, its currency can get stronger compared to other currencies.
3. Interest Rates
When a country offers high interest rates, people from other countries may like to invest in it, thereby increasing the demand of its currency, which can make it stronger.
Types of Forex Market in India
If you are keen on forex trading in India, you must learn about the types of markets where you can participate in such transactions.
1. Spot Forex Market
Here, you exchange one currency with another currency at the current rates. The deliveries of both currencies in a pair happen immediately.
2. Forward Market
In this market, two parties agree to exchange currencies at a predetermined rate on a fixed date in the future. On that future date, they do not exchange currencies; instead, they exchange value based on the movement of those currencies.
3. Futures Market
This market works like the forward market of currencies. However, futures currency contracts trade on regulated exchanges because they are standardised.
4.Options Market
This market allows you to buy and sell options contracts. The buyer of an options contract has the right (not the obligation) to purchase or sell a currency at a predetermined price on or before an expiry date.
How to Begin Forex Trading in India?
If you want to trade in the forex market, you do not need a demat account, which you require to trade in stocks, bonds, debentures, etc. However, you need to open a currency trading account with a broker registered with the Securities and Exchange Board of India (SEBI).
To open trading account, you need to provide Proof of Identity (PAN card, Passport, Voter’s ID, Aadhar Card, or Driving Licence), Proof of Address (Utility Bill, Bank Statement, Passport, Ration Card, Registered Lease, or Driving Licence), and Proof of Income (Form 16 or Current Income Tax Acknowledgment).
Then, you should link your currency trading account with a bank account. For that, you should submit the details of your bank account, such as bank account number, bank name, branch address, IFSC code, and account type.
The documents you provide will be verified. After that, your currency trading account will be opened on a broker’s online trading platform.
Conclusion
It is fairly easy to open a currency trading account in India and begin forex trading. That said, as a retail investor, you need to learn a lot about the forex market to begin your trading journey.
You must understand why the values of currencies fluctuate. Most important economic and geopolitical events impact the currency market directly. Hence, you should keep track of such events.
Only after you have a sufficient grasp of the basics you should begin trading in the forex market.