Are you interested in investing in forex markets and want to trade over the global market? Well, this is the best place to start from! In this blog, we have covered all the necessary queries that you might be facing, before you get on! So, let’s begin.
What is Forex Trading?
In simple words, Forex trading refers to the exchange of currencies in the foreign market to make a profit. Generally, the trading is conducted on currency pairs, in which the owned currency is known as base currency and the other currency on which exchange is facilitated is known as quoted currency. Traders research and speculate, whether the quoted currency will rise or drop as per their base currency.
Is Forex trading legal?
The Forex market is a wide trading platform that allows a large number of participants from institutions, banks, companies, and corporations to participate in international trade investment.
However, it is important to note that forex trading in India has some limitations associated with it. The regulations made by SEBI and RBI limit an individual from carrying out forex trade unless it is done by an authorized and registered Forex broker. However, Forex is not illegal but has some restrictions imposed on it which will be discussed further.
How does SEBI regulate Forex trading in India?
SEBI, Securities Exchange Board of India, a non-statutory body, is aimed at regulating the securities market with a fair investment practice, protecting the interest of potential investors. As per the guidance, SEBI imposes rules and regulations on Forex trading under:
- Foreign Exchange Management Act 1999, was developed to regulate the foreign exchange transaction in India. As per the act, it restricts the amount and purpose of foreign exchange transactions as well as prohibits the unauthorized dealer from exchanging securities.
- SEBI (Foreign Portfolio Investors) Regulations 2019 which regulates the limits of exchange and governs the eligibility and investment criteria for the currency exchange.
- Reserve Bank of India (RBI) regulates investment in foreign markets by specifying the currency pairs, maximum limits, and margin requirements.
What are the legal pairs fixed by the RBI?
As per the RBI circular notice, there are permissibly only four pairs of currencies in which an individual can trade in the forex market such as:
- USD/INR
- EUR/INR
- GBP/INR
- JPY/INR
However, apart from this, any pair of currencies would be termed illegal, and trading on that would lead to an illegal act and cause a penalty to the individual.
So, where can you do this? Explained below!
What is the legitimate way for forex trading?
As per the SEBI and RBI regulations, forex trading can only be done through registered and authorized brokers. They are also categorized as SEBI-registered brokers. However, the registered brokers must also specify qualification and regulatory compliance standards such as they must have a net worth of Rs. 25 crores, being a citizen of India, and employing at least one qualified compliance officer.
How does Forex trading work?
If you are thinking of investing or trading in a foreign market, you must know how it takes place.
- Opens a trade account – The trader opens up the trade by choosing the pairs such as EUR/USD. The trade takes place when the trader chooses to purchase or sell the currency as per the leading market nature. For example – If the EURO market hikes and appreciates in terms of the dollars, the trader purchases the pair.
- Market research – Once the trade is opened, the trader keeps constant research and gets updated on the technical analysis such as charts and indicators, as well as keeping an eye on news and events.
- Close the trade – Once the trade is opened, it is required to be closed by selling the pairs and checking the gain or loss incurred. For example – When the trader sells the euro, and it is appreciated in terms of dollars, then there is profit, whereas, if the euro has depreciated then it would incur a loss.
What are the advantages and limitations of forex trading in India?
A question which appears to all, and it should be! You must be aware of the risks and benefits associated with trading to make a clear decision on whether you are willing to invest or not.
Advantages of forex trading:
- High leverage – The major asset of trading is that you get to bid on a large amount of currencies and gain profit even on a low capital.
- Liquidity – It refers to the conversion of your investment into currencies. The market allows you to convert your purchase at any time in your currencies and redeem without any bond.
- Low-cost investment – The other benefit you get is that the transaction cost is low as compared to the other investments in the market. You are only supposed to pay for the bid and ask for the price, along with the trader commission if asked and decided before.
Now, comes the crucial part. The limitations which decide the nature of your decision. Check our previously published article on Is Forex Trading a Scam?
Limitations of forex trading
- High rate of fluctuations – The forex market is a highly affected market that experiences frequent fluctuations by the news, politics, economic occurrences, natural disasters, and market rates.
- High risk associated – As discussed above, the market is filled with frequent fluctuations. So it also has a good chance to affect your gain or loss in a wider way. You might even gain a wealthier amount or incur a loss more than your initial investment.
- Legal compliance – As in the above sections we mentioned that SEBI and RBI impose high rules and regulations for forex trading, so you need to be very careful while opting for your authorized broker or choosing your currency pairs.
Conclusion
Now, with this, we have come to the end of our trading discussion and I hope you have got the clicks of your investment tips.
Wrapping with the hot pointers, Forex trading is legal, only if it is regulated under the framed law of SEBI and RBI. Secondly, you can only trade in four pairs, other than that would lead to charge penalties. And the last, advantages and risks go hand-in-hand, so wisely take the decision.
