Investing in Foreign Currencies

If you've ever visited a foreign country and had to exchange your American dollars for British pounds sterling, Euros, Zloty, Thai baht, or any other foreign currency, you will no doubt have noticed that the exchange rate varies from day to day. You may get 40 baht to your dollar on Monday morning, but when you go back the next day to get more, you get only 39. If you only knew ahead of time the exchange rate would go down by a baht, you would have traded in all your money on Monday. That's the basis of the forex (foreign exchange) marketplace, and how people profit from it.

Unfortunately, it's a lot more complex than going up to the exchange window at the airport. Usually, individuals dabble in forex by purchasing currency contracts, which are bought and sold on a futures exchange. There is an interbank market, although this is usually used only by large institutions, and not retail customers. Trading in forex isn't always done just for speculation, and in fact, most times it isn't. Forex trading is often done by large institutions and multinational corporations as part of how they do business in multiple countries in multiple currencies. But because the prices fluctuate, there are speculators as well. And because this type of investment involves actually purchasing derivatives, and not the currencies themselves, and usually on a high margin, the risk for loss is great, and your entire investment could be liquidated if your predictions aren't spot on.

The forex market is huge, and consists for the most part of transactions that involve just a handful of major currencies, which include the Australian dollar, British pound sterling, Canadian dollar, Japanese yen, Swiss franc, and US dollar. More than the equivalent of a trillion US dollars changes hands every day. The forex market, because of its global nature, is a 24 hour market.

When you're buying and selling stocks, you research the company's fundamentals and look at charts. When forex investing however, your due diligence is more complicated. You have to research entire countries and their economies.

 

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