| First and foremost the difference between the | | | | analysts are employed. Normally, an individual is not |
| foreign exchange market and the stock market is | | | | allowed to trade in the forex market, as in stock |
| that while foreign exchange market is a global | | | | markets. But the individual could join an investment |
| market, the stock market is a local one. Secondly, | | | | banker who is authorised to deal in foreign exchange, |
| foreign exchange is traded between individuals, | | | | and that banker inturn passes on the profit or loss to |
| governments, banks, institutions, while the stock | | | | the individual, depending upon the positions taken. |
| markets deal with individuals, institutions and banks. | | | | Stock markets may trade in something like a billion or |
| Governments do not find a place in the stock | | | | more dollars per day. In the foreign currency market, |
| markets. Third in stock markets, what is traded is | | | | the amounts involved are four to nearly 9 times |
| stocks, or shares, which either can be replaced by | | | | more. And the market varies from day to day. |
| shares or other stocks. In the case of foreign | | | | While stock markets are generally immune to the |
| exchange markets, the only thing that is traded is | | | | foreign currency/exchange markets, there is now a |
| currency. | | | | closer relationship between the two, owing to |
| The foreign exchange market was introduced in the | | | | globalisation. A sharp dip in the forex market say for |
| early 70s of the last decade, when the Bretton | | | | dollar ratio with the Canadian dollar would lead to a |
| Woods Agreement between nations was introduced. | | | | surge of buying up dollars by Canadians and others, |
| Prior to that the value of the foreign currency was | | | | who will later cash in when the dollar regains some of |
| based on the stock of gold held by each nation. The | | | | its foothold. In foreign exchange markets, the deals |
| Bretton Woods Agreement did away with that, and | | | | are made even up to the eight or ninth decimal digit, |
| allowed countries to set their foreign exchange rates, | | | | owing to the awesome amounts involved. In stock |
| meaning that one dollar would be worth so much of | | | | markets this is not so. |
| sterling pound and vice versa, on a basis of demand | | | | There is a commonality however. Stock markets rise |
| and supply. | | | | and fall, at least now, in tandem with the forex |
| When countries trade with each other, through their | | | | market. The vice versa is also true. The reason is |
| business or from government to government basis, | | | | that the value of the stock in dollar terms has |
| they either have a surplus of one currency or a | | | | dipped, thus driving down the stock value, and a rise |
| deficit in another. They try and make up the surplus | | | | in the dollar value also shows a reflection in stock |
| to work for them by putting it on sale to other | | | | sales, for those who want to take advantage of the |
| countries which have a shortage of that currency, | | | | rising dollar value. |
| and where they have a deficit in a particular | | | | Another commonality is that due to globalisation, and |
| currency, they buy from a country which has a | | | | freeing up of foreign exchange rules by countries, |
| surplus of that currency. Read this carefully. This is | | | | allowing free float of the currency (meaning let the |
| the crux of the matter. | | | | market decide the value of the currency), leads to |
| Stock markets generally work on the same principle, | | | | people taking long and short positions, in much the |
| but they have fixed hours of trading. In foreign | | | | same manner as commodity markets or stock |
| exchange markets, it is taking place all the time, | | | | markets. |
| throughout the day and night, 365 days in a year. | | | | The most obvious and significant difference is that |
| Obviously, just as in stock market, countries take a | | | | stocks need time to be cashed, but foreign currency |
| hit when their currency depreciates, or their need for | | | | markets always deal in cash only! Even this is |
| a currency is so high, that the other dealing country | | | | changing. Maybe in the days to come, there may be |
| takes advantage of that high demand in the market, | | | | a further blurring of the difference between the two. |
| and marks up its surplus currency to a higher level. | | | | Most would argue that stock markets close down at |
| This trade reflects in some measure the stock | | | | a particular time, while forex markets go on trading; |
| market. Demand and supply apply equally. | | | | that holds little water today. Given the globalisation, |
| As countries have liberalised their foreign exchange | | | | there are stock market brokers who keep the |
| regimes, except one or two, the market rate of the | | | | midnight watch, watching the indices of countries |
| currency is determined by demand and supply. This is | | | | online in day working time, and accordingly booking |
| a complex mechanism, and is based on various | | | | and selling orders. |
| parameters for which specialist economists and | | | | |