Exchange vs Converter: What’s the Difference?
Today electronic trading has gained incredible popularity due to its versatility, the variety of available financial markets and, of course, the profit potential. At the same time, the most popular form of electronic trading is currency trading, which takes place in the notorious FX market. The popularity of this type of trading gave rise, on the one hand, to the creation of a myriad of currency exchanges, and on the other hand, to the creation of currency converters, which allow to perform the instant one currency conversion into another, with the possibility to analyze the history of their exchange rate dynamics, etc. But what is the difference between them and what are their features?
In this article we will talk about what a currency exchange and a currency converter are, and what the discrepancy between them is.
What is a Currency Exchange?
A modern currency exchange is an organized electronic trading platform, which is an element-participant of the international currency market. It is also worth noting that it is at currency exchanges that the free purchase and sale of foreign currencies takes place, where the current quotations of national currencies are formed under the action of free market pricing, i.e. the specific current supply and demand. Modern FX exchanges are electronic trading platforms, which are elements of the infrastructure of the international Forex market. The main activity of currency exchanges is the provision of services for organizing and conducting currency trading between various participants.
FX exchanges organize three basic elements of the modern foreign exchange markets infrastructure: trading systems, clearing, and settlement systems. The trading system at exchanges is used for direct search of counterparts, i.e. a seller and a buyer, who conclude transactions for purchase and sale of currency. The clearing and settlement system is used to make further settlements between the buyer and seller of currencies.
One of the advantages of the Forex market is the ability to open and close transactions around the clock, allowing traders to combine their core business with trading. In this case, the operating mode of Forex is five days – the market opens on Monday and closes on Friday. It does not work on weekends and international holidays, such as New Year and Catholic Christmas. In addition, there are national holidays when one of the sessions may not work. All trading is divided into four sessions: The Pacific session opens first, then the Asian session, followed by the European session, and the trading day ends with the American session.
Each region of the world has its own financial centers – the cities where banks, financial institutions, and large companies are concentrated. All financial flows of the region are concentrated in that center, for example, in Asia – Tokyo and Singapore, in Europe – London, Frankfurt, etc. Depending on what time and through which financial center currency flows are processed, trading sessions are distinguished. The European and American sessions have the highest volatility and traded volumes. The most relaxed session is the Pacific.
As already noted, one of the main functions of exchanges is to provide trades in financial instruments and currencies traded on them. Another function of an exchange is to redistribute free funds between different sectors of the economy and between different participants of the single international financial market. The main participants in trading at currency exchanges are banks, as well as various management funds. They, precisely, ensure the inflow of free financial resources into more efficient sectors of the economy, both within the country and throughout the international financial system.
What is a Currency Converter?
A currency converter is a calculator that converts the value or quantity of one currency into the relative values or quantities of other currencies. Currency conversion is the possibility of free exchange of monetary units of one state for monetary units of another in the process of carrying out various kinds of foreign economic transactions. In other words, the convertibility of currency means its ability to carry out its payment functions not only in one but also in all countries of the world without direct government intervention. Such currencies are freely convertible.
Today, freely convertible currencies are a minority of all existing currencies. Only the American and Canadian dollar, the euro, the Japanese yen, and others can be freely exchanged for all state currencies today. There are seventeen of them in the world. A freely convertible currency characterizes a country as the most economically developed one. Free convertibility of currencies considerably simplifies foreign economic activity for the country and its residents.
Currencies that may not be exchanged for all monetary units of other states have limited or partial convertibility. This may be due to political or economical reasons. The more a national currency is convertible, the higher its economic prestige is in the eyes of other states. In some cases, it is only possible to exchange limited convertible currencies through free convertible currencies.
Currency conversion is an important indicator for any foreign economic activity, including Forex trading on the international currency market. This market is based on the principle of free conversion, which means that currency pairs are composed mainly of monetary units that can be freely exchanged. That is why residents of many countries have to trade, for example, in dollars or euros, as the currency of their country is currently not freely convertible.
Currency converter is an indispensable tool for any trader in Forex because dealing with multiple currencies simultaneously, he gets access to a convenient and versatile tool to determine the ratio of one currency to another. Moreover, this tool allows viewing the history of one currency rate against another over a certain period of time, keeping statistics as well as receiving and sending certain currencies if the service itself provides such a service.
Exchange vs Converter: Differences and Functional Features
Now that you know what a currency exchange and a currency converter are, it’s time to take a closer look at their features and the differences they have.
- Currency Exchange
Currency exchanges carry out operations on free purchase and sale of distinct state currencies based on quotations – exchange rate ratios. Currency exchange ratios (quotations) largely depend on the issuing countries’ economic situation and reflect the purchasing power of currencies. At currency exchanges, there is a process of setting the real market rate for a particular national and foreign currency. All currency exchanges are legal entities and essential elements of the currency market infrastructure.
The Forex market acts as an intermediary between states and companies from different countries, allowing them not to complicate the trade process by determining the prices of goods. Often contracts are made based on market rates. However, in this situation, significant risks are associated with fluctuations in exchange rates. In order to minimize these risks, transactions are often concluded with the use of the so-called basket of currencies as an equivalent. Any currency exchange involves the possibility of exchanging several currencies. But it should be noted that some currencies do not have sufficient liquidity and, therefore, rarely become an object of investment for foreign market participants. It is difficult to overestimate the role of the financial market at the present stage, and its development will certainly continue.
When it comes to currency exchanges, central banks come into play to regulate currency prices, so that speculators do not bring the international currency market to disaster with their intense activity. In order to influence the exchange rate of their own currency, banks intervene in foreign exchange, i.e., they buy and sell foreign currency. Such price adjustments are also made through other financial instruments.
For a large number of speculators, who are not able to control the movements on the market on their own, banks’ attention to the economy is a significant advantage. When the currency is fluctuating within a set price corridor, it is possible to make a good profit by first buying and then selling the currency units. The boundaries of such a corridor are usually called an “overbought” and “oversold” zone, which can be identified by special oscillator indicators and levels.
The main instrument on the exchange is a currency pair, for example USD to EUR (dollar/euro). To make money, it is necessary to open a buy or sell position and, accordingly, expect growth or decline in value. To trade successfully, it is necessary to be able to forecast price movement correctly. For this purpose traders use fundamental and technical analysis. In the first case they thoroughly study the economic news of different countries, on the basis of which they make forecasts about the changes in the value of currencies. In the second case they use various trading instruments to analyze charts and price trends.
The Forex market was originally designed for exchange trading via the Internet. To make deals and make a profit, you don’t even need to leave your home. To do this, you need to install on your PC, laptop or smartphone a special trading terminal and connect to the Internet.
- Currency Converter
A currency converter is an easy-to-use tool for converting one currency into another and thus keeping track of how much one currency is worth in relation to another. This tool is clearly different from an exchange of currency where currency is traded, as its main function is usually to convert the value of one currency into another and provide access to all kinds of data related to the history of changes in their quotes. Currency exchange, in turn, is a full-fledged platform that provides access not only to the trading terminal, which contains a large list of tools for analyzing price movements on the chart of currency quotations, but also provides a personal account with different settings for more convenient and comfortable trading.
Currency converter, being a fairly simple service from an informative point of view, has many different advantages, and here are some of them.
Converters allow users to determine real-time exchange rates for a particular currency in relation to several other foreign currencies. Many companies use these online tools to determine profit margins for buying and selling, especially for imports and exports. It is easy for travelers to calculate how much money will be needed during an overseas trip.
- Recording Historical Data
Another advantage of using currency converters is that they give you access to historical data on different currencies. Ideally, if you are converting your money, you can check the exchange rates between different developed countries. In other words, it will be more convenient to have access to lower rates, and this will help you perform the currency conversion you need. This advantage is one of the most significant when it comes to keeping track of quotes for any currency in retrospect.
- Ease of Use
Because of their simplicity and accuracy, online converters are easily accessible and make calculations easy. All you need is a figure and the currency you want to convert. The entire process is automated, saving you from having to calculate any numbers. For example, after you enter the figure you want to convert, the next step is to specify the currency. The numbers are used and the value is generated instantly. The ease of use of this service plays an important role because an overabundance of unnecessary information, delays in calculations during currency conversion and other technical difficulties can have a negative impact on the user experience.
- Currency Accuracy
One of the undeniable advantages of currency converters is their accuracy and speed. When trading on the currency market, every second counts and often traders need accurate data and high speed for successful trading and decision-making. When working with this tool, getting the desired results is a simple process that does not require much time. Results are obtained in seconds, and you can do it from anywhere. However, you need an internet connection and a device with internet access to utilize these services.
In order to summarize all above, it is necessary to say that trading of currencies has a special place in the system of electronic trading, which is due to its rapidly growing popularity due to its simplicity, convenience and high profitability, which can be obtained with a working strategy.
Having access to such indispensable tools as currency converters, traders can be sure that they always have an exact quote for each currency they deal with at the Forex exchange. Thus, currency trading is a whole ecosystem, which combines not only currency exchanges for trading, but also a lot of different systems and services, which simplify the process of trading itself.