Forex or Foreign exchange is similar to the stock market but deals in international currencies instead of company shares. It originated after the inception of the Bretton Woods System which established the US dollar as the common currency for all international trade. That gave birth to the market of foreign exchange as we know it. The most significant difference between the foreign exchange market and the stock market is that forex runs 24/7, where people trade one currency for others to make a profit. The stock market features the buying of stocks in exchange for money.
It is quite easy to understand forex and how it works. Unlike the stock market where trading takes place against thousands of shares; the foreign exchange market is limited to the country’s currencies. It is not regulated by any central authority, which makes people a bit sceptical while investing in it. But just like cryptocurrency, forex is also completely safe, there are a lot of registered brokers who will help you connect with the buyer or seller who is willing to make a deal. The exchange rates keep fluctuating depending on the country’s economic performance against the dollar. Majorly there are two exchange systems, flexible and fixed which dominate the market.
The fixed exchange rate, as the name suggests, is not flexible, which means the currencies are tied to each other with an already set price. The central banks of different countries need to work as a shock-absorbing mechanism so that the exchange rates can be modified as per the market forces of demand and supply. The government financial institutions must buy and sell other currencies to maintain the balance of the foreign fund. When the price of a currency increases, the banks must sell them, and when it falls, the banks buy more of that currency to compensate for the loss. The foreign exchange balance needs to be maintained at all time to safeguard the value of their money.
The flexible foreign exchange rate, also known as the floating exchange rate, is dependent on the fluctuations in the global forces of supply and demand. Unlike the fixed foreign exchange rate, these differences cannot be brought under control by the central bank and other financial institutions. Here the value of the currency tends to increase with the rise in the demand for the money and falls when the currency’s demand falls. After 1973, the collapse of the Bretton Woods System gave space to other currencies to move merely in the international market. The US Dollar saw heavy competition from the UK’s Pound Sterling, the Euro of different European countries and Dinar of the oil-producing countries in the middle east.