When it comes to creating wealth, the equity market isn’t the only financial market available. In fact, there are other markets like the currency market, which is even bigger and witnesses more trade volume than equities. Trading in the currency market is a fast-paced affair and is well-suited for generating profits in the short term. If you’re someone who might be interested in this, then here’s a quick forex market overview. Let’s begin by taking a look at what currency trading is.
What is currency trading?
Currency trading is very much like equity trading, except for the fact that you would be buying and selling currencies instead of shares of some companies. That’s not all. In the forex market, you would be trading in currency pairs instead of just a single currency.
As with the equity market, the currency market also has two segments - the spot market and the derivatives market. However, in India, you can only participate in the derivatives segment of the forex market and can only trade in a few select currency pairs.
The currency pairs that you can trade in are split into two - INR pairs and cross-currency pairs. INR pairs are currency pairs that have the Indian Rupee and a foreign currency, whereas cross-currency pairs have two foreign currencies. The INR pairs that you can currently trade in are USD-INR, GBP-INR, EUR-INR, and JPY-INR. Similarly, the cross-currency pairs that you can trade in at the moment include EUR-USD, GBP-USD, and USD-JPY.
Three exchanges in India currently allow currency trading - the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and the Metropolitan Stock Exchange of India (MSEI).
How does currency trading work in India?
As part of the forex market overview, we’re now going to take up an example to give you a better idea of how currency trading works in India.
Let’s say that you’re interested in the USD-INR currency pair. Here, the USD in the USD-INR is referred to as the base currency, whereas the INR in this pair is referred to as the quote currency. The current exchange rate of the USD-INR pair is 82.6788. This effectively means that you would have to pay 82.6788 of the quote currency (INR) to purchase 1 base currency (USD).
Now, assume that you wish to purchase a future contract of the USD-INR pair on December 10th, 2022. The date of expiry of the contract is two days before the last date of the current month, which is December 29, 2022. The lot size for the contract is 1,000 USD, which means that you would have to purchase a minimum of 1 lot, which is 1,000 USD. At the current exchange rate, to purchase 1,000 USD, you would have to pay ₹82,678.
However, here’s where it gets exciting. You don’t have to deposit the entire amount to purchase one lot of USD-INR futures. Instead, you’re only required to deposit a fraction of this amount as a margin to purchase 1 lot. Let's say that you would have to deposit only Rs. 2,097 to purchase one lot of USD-INR futures.
By depositing the margin, you purchase 1 lot. Now, assume that after three days from the purchase of the contract, the USD-INR exchange rate rises to 83.0223. At this point, you decide to sell the lot of 1,000 USD and realize the gains. The profit you would get on this trade would be ₹344.3 [(83.0223 - 82.6788) * 1,000].
Conclusion
As you can see, trading in the currency market is very easy and has the potential to give you massive gains in the short term. However, keep in mind that the market can be very volatile at times. That said, whether you wish to trade in the forex market or invest in some upcoming IPOs, having an active trading and demat account is mandatory. Visit Motilal Oswal today to open a demat accountand a trading account in your name and get started with currency trading.
Related Articles: What Are Cross Currency Pairs And What Do They Mean? | How does a Spread Contract Help in Currency Trading | How Currency Fluctuations Impact your Financial Plan | How Global Factors have Influenced the Value of the Rupee | How Domestic Factors Influence the Value of the Rupee