WHAT IS FOREX TRADING?
The word Forex is a portmanteau of the two words Foreign and Exchange. Forex Trading is the act of trading one country’s currency for another, in pursuit of profit. As currencies of the world fluctuate in value due to market conditions and world events, the value of one country’s currency does not have a fixed relationship with other world currencies. It is therefore possible to purchase currency of one country when it is affordably low in value, in the hope that it will gain value in the future, and result in a net profit when it is exchanged back to the trader’s native currency.
HOW DOES FOREX TRADING WORK?
A purchaser uses a quantity of a specified currency that he owns, (called the base currency) to purchase an amount of a different foreign currency (called the quote currency) for an agreed exchange rate. The hope is that the quote currency will rise in value and/or the base currency will drop in value. For example; An investor agrees to spend Rs.10,000 and receives 550 Swedish krona. After several years, the Indian rupee may have devalued significantly, and the Swedish krona may have gained value. Now for the 500 Swedish krona that the investor holds, he can purchase Rs.11,000 Indian rupees. When done on a large scale with significant amounts of money, the net gains can be high.
WHAT ARE THE DISADVANTAGES?
The reserve bank of India has made forex trading in India illegal, except when done through a Securities Exchange Board of India (SEBI) registered forex trading broker in India, and with INR (Indian rupees) as the base currency. If you are an Indian resident, it is illegal to do it any other way, and you can find yourself in trouble under the Foreign Exchange Management Act (FEMA), 1999 and face a fine or prison if you are caught, tried and convicted. There is no prohibition for NRIs to carry out forex trading any way they choose.
Forex trading always involves risks. Net gains are not guaranteed, and should never be assumed. Markets can take unexpected twists and turns, which can devastate certain currencies. An example would be when war breaks out. It is therefore absolutely necessary to keep watch over the currencies you are dealing with and act in good time to limit loss if they appear to be sliding in value. To highlight the possibility of loss, let us imagine another fictional scenario. You have traded Rs.90,000 for 5000 Malaysian ringgits, because with a new government about to be formed, the chances are high of the ringgit rising in value. However, after several weeks of the new government, it gets toppled and the country is left in disarray. As a consequence, the ringgit falls sharply in value, and the 5000 ringgits you own would now only buy you Rs.81,000. You will now face the dilemma of whether to exchange the ringgits now before they have a chance to devalue further, causing you even more loss, or you could wait and hope that they recover their value in the future. These are the choices you need to make when you get involved in forex trading.
HOW TO TRADE ON THE FOREX MARKET?
If you are in Indian citizen who is resident in India, you will first need to appoint a forex trading broker who will be able to carry out your instructions legally. Finding the best forex trading broker in India 2020 can be tricky as there are so many advertising their services, you may be confused which one to choose. The best advice is to always try more than one before making your selection. Which one is best for you will depend on your circumstances and your intentions. Some brokers may have very good experience trading in certain currencies, but none at all in others. Make sure they can actually offer you the currencies you are interested in. Check out their price plans as these will differ between brokers and can sometimes be complicated. You may get one month maintenance free, but be charged monthly from the second month onwards. You may get charged a fixed fee per trade, or you may get charged a percentage of the value of each trade. Which brokers’ price plan is the best for you is something that you will need to decide, and it will depends upon how many trades you expect to be doing each month, and what value they will be at.
HOW TO OPEN A FOREX TRADING ACCOUNT?
This can be done for you by your appointed SEBI registered forex trading broker. Please take note that there may or may not be charges applicable for opening the account, so make sure you ask about this before deciding which broker to use. There are also two types of accounts. One for individuals (personal account) and one for businesses (corporate account). As previously mentioned, the Indian rupee must be your base currency, and different brokers may have a different range of currencies they are able to offer you.
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