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Currency trading is the biggest stock exchange markets in terms of both volume and value across the world. Also known as foreign trading, currency trading allows investors to trade in currency pairs. In India, currency trading though in its nascent stage, has begun to attract attention from investors.
If you are a beginner to currency trading platform in India, here is all you need to know.
Legality
Currency trading is legal in India.
Eligibility
Any resident Indian individual, company, banks and financial institutions can do currency trading. Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) are currently now allowed to participate.
Reasons to Trade in Currencies
Most investors are drawn to forex trading because the transaction costs are low, and liquidity is high. It allows investors to earn higher returns with minimum risk capital.
Understanding Currency Pairs
Unlike in the stock market where you can buy or sell a single stock, the forex market requires you to trade in a currency pair. This means that you buy one currency and sell another currency.
A currency pair comprises base currency and quotation currency. The base currency is expressed in terms of one unit. For example, in USDINR currency pair, USD is the base currency, and INR is quotation currency. USD1/INR = Rs71 means that you can get Rs71 in exchange of 1 US dollar.
Six major currency pairs such as GBP/USD, USD/CHF, USD/JPY, USD/CAD, AUD/USD and EUR/USD are actively traded in the world on a foreign exchange. Hence, they are prone to lesser volatility and offer higher liquidity. The rest of the currency pairs are considered minor currency pairs because they are less traded and hence, less liquid.
At present, Indian currency traders can trade only in four currency pairs namely USDINR, GBPINR, EURINR and JPYINR on Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Union Stock Exchange (USE) and Multi Commodity Exchange (MCX-SX) platforms. The Indian currency stock market is jointly regulated by Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). The trading hours are 9:00 am to 5:00 pm from Monday to Friday.
Types of Currency Market
There are three types of forex markets:
- Spot Market: The currency transactions in the spot market happen with immediate payments at the exchange rate prevailing at that point in time.
- Futures Market: The payment and delivery in currency transactions in the futures market are made at a future date, but a predetermined exchange rate. The terms of currency trading deals are fixed, leaving no scope for further negotiations.
- Forward Market: Forward market operates on similar lines as the futures market, the only exception being that the terms of currency trading deals are open for further negotiations.
Tips for Currency Trading
- Understand the Basics: Currency trading is a highly dynamic market. It calls for a deeper understanding of its operations. So, before you start trading actively, familiarize yourself by watching its workings and other traders for a few weeks to months. This will give you good working knowledge.
- Start Small: As a beginner, it is important to adopt a conservative approach and keep your risks minimum. Invest only the bare minimum amount of money initially and do not think about making quick profits. Once you get comfortable, you can take more risks.
- Monitor Prices and Trends: Currency market price fluctuations and trends are directly variable to socio-economic-political factors, international trade, fiscal position, interest rates, trade deficits and inflation of a country or global economy at large. You need to closely watch on all these parameters on a daily basis to optimize your forex trading investments.
- Hire a Professional Currency Broker: Forex trading in India is allowed only through currency brokers registered with SEBI. So, you should look out for professional, reputed and trustworthy currency broker services.
Currency trading is a good option for investors who want to gain exposure to foreign securities and markets.
