What is Forex: Definition, Functions, and Participants in the Forex Market

F Actually, what does Forex mean? Until now, it turns out that there are still many Indonesian people who do not know the meaning of the word.

Not a few of the Indonesian people also consider Forex as an online gambling activity.

This wrong assumption makes many Indonesian people antipathy to Forex. Finally, they do not know that Forex is one of the most promising online business ideas.

For those of you who want to know more about Forex, this article will provide a review of what forex is. Starting from the definition of the word, function, and the actors in the world of Forex.

Understanding Forex

What is Forex
photo forex : pixels.com/RODNAE Productions
What is Forex ?

Forex is an abbreviation of the word Foreign Exchange. The word "Foreign" can mean foreign or foreign, while the word "Exchange" can be interpreted as an exchange.

In this case what is meant is currency exchange.

Foreign Exchange can be interpreted as an activity of exchanging foreign currencies. So, simply Forex is the activity of buying and selling the currency of a country against the currency of another country.

The Wikipedia page states that forex in Indonesian is also known by several terms, namely the Forex Market or Foreign Exchange.

Both terms have the same meaning, namely a trading activity involving 2 currencies from different countries as the object of the trade.

Even more deeply in the process of buying and selling currencies, there is a role from the main money markets around the world and takes place 24 hours a day in a row.

Forex-Market-Hours

In its rotation, global forex or the forex market will start from :

  • New York opens at 8:00 am to 4:00 pm  
  • Tokyo opens at 7:00 pm to 3:00 am  
  • Sydney opens at 5:00 pm to 1:00 am  
  • London opens at 3:00 am to 11:00 noon  

Forex Market Functions

Forex Market Functions
Forex Market : Foto pixels.com/Burak The Weekender
In the process, forex has several main functions that are very influential on the perpetrators. The function of forex is divided into 3, namely as follows:

1. Simplify the Currency Exchange Process

As we know, in everyday economic activities, humans sometimes need funds in the form of other countries' currencies. Whether it's used for business purposes, travel, shopping, or storage.

Currency exchange can be done by a system called Clearing. Now one of the functions of forex itself is to provide these services.

To make things easier, an example of this service is a money changer service that we usually find in various places, from banks to money exchange counters in various places.

2. To Hedging

Hedging in Indonesian is also known as hedging.

This is an action that is usually taken by a forex trader as a "guarantee" so that the value of his investment funds does not decrease or lose when he sells forex in 2 different markets.

In this case, the bank also plays a role, both domestic banks and US foreign banks as guarantors of the funds.

3. To Conduct Arbitration

In this case, what is meant by Arbitrage is the difference in the interest rates of the 2 currencies. Arbitrage is an action taken to take advantage of the difference in the value of the currency itself.

Simply put, this action is done by buying a currency that is low in value in a country. And then sell the currency in a country where the value of the currency is high.

Participants in the Forex Market

Who is Participants in the Forex Market
The players in the forex market, photo Pixels.com/Alena Darmel 
In the forex market, of course, there are several parties involved and giving influence in it or in terms of players in the market.

The players in the forex market can be divided into 7, which are as follows:

1. Bank

Banks play an important role in the forex market. In this case, the term Interbank Money Market (PUAB) is known.

PUAB itself has a role to fulfill almost all needs from buying and selling and currency circulation in the global business field.

In carrying out its functions, sometimes banks will carry out the process of buying and selling currencies on behalf of their customers. But in large quantities, the transaction will be carried out on behalf of the bank itself.

PUAB itself is also used by forex brokers to gain profits in bringing together forex sellers and buyers directly.

From there Forex brokers can get a lot of profit. However, currently, the system used by PUAB has been developed with an electronic system that is more effective and efficient.

2. Business Actors

The second forex market participant is the need for companies or business actors when making payments using foreign currencies.

Basically a business often requires funds in foreign currency when making transactions.

Small business transactions do not have a large effect on the value of a currency. However, it would be different when talking about large corporations.

Here large companies have a sizeable share in the forex market. It can even be unexpected if they carry out the act of releasing large amounts of foreign currency.

When they release it, neither the market nor the speculators can predict it directly. As a result, the value of a currency can move up or down.

3. Central Bank

The Central Bank in this case has the role of controlling the money supply, the occurrence of inflation, and also related to interest rates. With its very important role, the Central Bank can easily influence the development of the Forex market.

One of the advantages of the Central Bank of a country is that only by making an intervention is enough to create turmoil in the state of the forex or foreign exchange market.

This is due to concerns about the actions of the Central Bank which could increase or decrease currency interest rates.

So more or less the sustainability of the currency market is indeed determined by the movement of the Central Bank in a country.

4. Investment Management Company

Generally, Investment Management Companies that play in the Forex market do not make this business their main source of income, let alone as a step of speculation.

The company is an agency that usually manages several funds, such as; pension funds or donations from foundations.

All the funds they use in the forex market are sometimes just "rotated" to get additional income for the company.

5. Hedge Funds

The next actors are Hedge funds, namely companies that do play in the forex market as speculators.

The funds they release are capital that is truly maximized in the forex market. There is no other reason for them but to get big profits from these activities.

And what is surprising is that Hedge funds have the ability to grow big. It even has the ability to influence currency values ​​better than the Central Bank.

If this happens, it will be very difficult for the currency to move properly because it is already under the control of a profit-oriented corporation.

6. Forex Brokers / Brokers

Until now, forex brokers are still the party that makes the most profit from the forex market.

Basically forex brokers can be individuals, groups or companies that have a job to bring together customers/buyers with foreign currency sellers.

The existence of a forex broker is very helpful for forex business people or what is commonly called forex trading.

However, there are also irresponsible, aka fake, forex brokerage companies. This broker is actually the most detrimental party, especially for new players in the Forex business.

As input, you can see some trusted forex brokerage companies that are widely used by traders. The list of forex brokers can be used as a reference so you don't get stuck using fake brokers.

7. Retail Traders

Retail traders are at the very bottom of the forex market participants chart. Retail trader transactions are generally very small when compared to big players such as banks, financial institutions, speculators, and others.

Forex Trading Is Not Gambling, Here's The Reason

Forex Trading Is Not Gambling
Forex Trading Is Not Gambling, photo pixels.com/Pavel Danilyuk
We should first understand what gambling means before saying Forex is gambling.

In general, the notion of gambling is any form of betting in which to profit depends on luck or mere speculation. For example cockfighting, horse racing, lottery, and others.

In some cases, gambling is also carried out based on analysis, for example soccer betting. But normatively, gambling such as soccer gambling is a prohibited act.

While forex trading is trading or buying and selling of foreign currencies which is carried out through an analytical and full calculation process so that it can determine when it is time to buy and when to sell.

Trading foreign currency legally and normatively is not an activity that is prohibited in Indonesia. So, it's actually not correct to say that Forex trading is gambling. In fact, forex is a very promising business opportunity if the business person can manage risk well.

However, Forex can become a gambling activity when the person doing it doesn't know how to manage money and places very large lots in trades because they want to get rich quick.

For example, you have $1000 in your trading account. But because you want to get rich quick, you place 5 lots for one trading position. When the transaction is not as expected, your funds will run out quickly or a margin call.

Conclusion

From the explanation above, we can understand that Forex is a type of trading or the process of buying and selling a country's currency against other countries' currencies.

The Forex market is the market with the largest and most liquid assets in the world because its trading range covers the whole world.

Thus a review of the meaning of forex, its functions, and participants in the forex market. Hopefully it can be additional useful knowledge.
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