We all know that different countries across the world use different currencies. If you want to visit a foreign country you need to trade in your pounds sterling for the appropriate currency. The amount of foreign currency you will get for your pound depends on the exchange rate at the time of the transaction.
Rates of exchange vary from moment to moment due to varying external influences. It is therefore of little wonder that there are any number of forex traders out there trading in foreign exchange, or forex, with a view to making a profit against ever changing currency values.
Trading in forex is a little like trading in stocks and shares. Until the internet, it was a venture only really undertaken by banks or similar institutions. However, this market is now open to anyone who has a computer and a little know how.
The forex market is incredibly fast paced and arguably more volatile than the stock market. You can lose or make a fortune in a matter of seconds when trading currencies. That said, it is a 24-hour market so your trading day can be as long as you want it.
Trading in currencies is a little bit like betting. It is speculative, as you are buying currency which you believe will increase in value against another but there are no guarantees and if you get it wrong, you will be at a loss. Trading or speculating on changes in currency value is again like forex trading on the stock market but perhaps even trickier and with more risk.
To start trading forex, you will need reasonable financial capital and a sound understanding of the risks involved. Because of the amounts of money involved, it is usually countries and corporations who trade in foreign exchange but individuals, with a firm understanding of how these markets work, can also get in on the action.
When deciding what currency to buy, you will be presented with pairs of currencies. The base currency is always the currency stated first and is a unit of 1, whilst the figure given will be how much of the quote currency you will get. For example, if you see GBP/USD 1.56 this means that for each 1 you will get $1.56. The base currency is the pound and the quote currency is the dollar.
In order to make this transaction make money for you, you will need to have a good reason to suspect that the dollar is set to increase in value against the pound, at which point, you sell the dollars and purchase another currency on the same basis. The difference in the purchase price and sale price is your profit.
Individual forex traders will often buy relatively small amounts of different currencies and hold on to them until they get the best deal possible. If you are planning on holding on to your currency for the medium to long term, consider the possibility of an interest bearing deposit to increase your capital.
You will arguably need a lot more expertise as well as capital to get started in the foreign exchange market than with the stock market but it is possible to invest, sell and make a profit in this field.