Forex, short for foreign exchange, refers to the world's foreign currency market. It is also known as currency trading and is the process of exchanging one currency for another in order to make a profit from the conversion. Forex is not just for investors. About 5% of exchanges from one currency to another are necessitated each day for commerce and international businesses. Whether the exchange is done for standard reasons or for the purposes of making a profit, it falls under the umbrella of foreign exchange or Forex transaction.
How Forex Works
In currency trading, you exchange one currency to another and later convert the money back. The value of either currency would have changed during the time you held the currency. Depending on the value of either currency, you would have made a profit or loss when you change the money back.
Investors speculate on the future value of currency. The idea behind Forex is the same as the idea behind purchasing stock. You purchase a stock and wait for its value to increase, so that you can sell it at a higher price and make a profit. With Forex, you are doing the same thing but with actual currency. For example, let us pretend you can exchange a single dollar for another currency in the market. You decide to go to Forex and exchange $1 U.S. dollar for Euros. Let the value of a Euro be $1. So you pay one dollar for one Euro. If you go to exchange the Euro back into dollars, and the exchange rate now is, $1 = .50 Euro, you have doubled your money, because that one Euro you have is worth $2. That is a simplified example, but shows how you can make profit in Forex.
Depending on whether or not the value of the currencies change, you could make a profit or lose money from the trading. Of course, you can trade in any currency and you are not limited to Euros and dollars.
Forex can be traded 5 days a week, 24 hours a day. Trading takes place during business hours and is global in nature. So, when one market is closing, across the world another market is opening. This lets you trade during any time of the day.
With discount brokers, the cost of trading Forex can just be a few dollars per trade. Beyond that, the cost depends on how much you choose to invest.
Currency markets are volatile and require careful monitoring if you choose to trade in Forex. Timing as to when to get in and out with a particular currency plays a crucial role. It is essential to know all about Forex trading before you enter the foreign currency market.