LIQUIDITY AND FOREX EXCHANGE

Economics is a complex concept. Markets, free trade, the ebbs and flows of prices, the wants and needs of human beings and other related, yet diverse concept, are all factors that contribute to its intricacy. There are various markets in economics, each with their own peculiarities, liabilities and incentives. Examples include the stock market, the bond market, the commodities markets, the real estate market and of course, the Forex market. Each of these markets have their benefits and disadvantages. For instance, the real estate market appreciates easily and can be leveraged. The stock market is volatile, but gives an edge over inflation and grows with the economy. The Forex market, however, has the advantage of being the most liquid market in the world.

What is liquidity?

Liquidity is an easy concept to understand. Say Mr A has an asset to sell (a house, or some stocks), he would want to sell it in a way that he is able to retain the value he sells it at, and probably make some profit. He would not want to sell it in a situation where it loses a large part of its value. If nobody wants the house, or the stocks at the value he offers, he would have to reduce the price, so as to tempt buyers into ridding him of the property. The liquidity of the asset class is basically how quickly he can convert the property to cash, without losing so much of its value. In markets that lack liquidity, assets have to be depreciated in value for them to be sold quickly. Markets like the real estate market have low liquidity.

The liquidity of Forex market

The Forex market accounts for about $6billion per day. The Forex market (short for foreign exchange market) is the market where foreign currencies are bought and sold. For this, the exchange rate is important; the price of a currency in relation to other currencies. The Forex market is a global market which is open 24 hours, and is most readily available for business transactions. This makes it the most liquid market in the world.

Stock market transactions usually take approximately four to five days to settle. The real estate market has transactions that go beyond a year to settle (although this isn’t usually the case). The Forex market takes around two days for transactions to settle (the exception is the Canadian dollar against the US dollar, which takes around a business day after to settle). Forex is readily available due to the existence of liquidity providers, who are large factors in stability of price, and an easy platform for people to trade currencies with.

Real estate brokers are in most cases, liquidity providers, and there are brokers like HotForex provide the platform for people to trade easily, with a host of other services that help customers navigate the market easily. Brokers sometime buy currencies from traders in exchange for other currencies, and other times, they help buyers and sellers connect through their platform.