Learning about Forex Trading
What is Forex Trading? Very simply put, Forex means the Foreign Exchange Marketplace where you can trade currencies. In order to conduct trade and business, currency needs to change hands. Let us take an example. Suppose you are living in India and want to purchase a perfume from France. So it would be considered as an import and either you, or the company that you buy the perfume from is compelled to pay France in Euros. It implies that the Indian importer of the perfume has to exchange the equivalent amount of Rupees into Euros in order for the exchange to take place. Similarly, if you're travelling abroad, your local currency is of no use there because it will not be accepted, you need to convert your currency based on the prevalent exchange rates and that is done via Forex. The Forex market is actually the largest marketplace you can ever find in the world. The currency market eclipses the stock exchange market several times over.
What does exchange rate mean?
When you exchange currencies, you pay the price of a single unit of a particular foreign currency in your own currency. The amount of money in your currency which is equal to a single unit of the currency in question is the exchange rate for that currency in your country.
Why is Forex so important?
If we take statistics into account, the daily trading in Forex is estimated to be at a staggering amount of $5 Trillion each day. This fact alone makes it the biggest market with the most liquidity among any financial marketplace, beating stock exchange trading to a sorry second place. Great Britain holds the biggest share of the Forex markets, with about 40% of all trading happening in London. This happened because in 1979 all foreign exchange control methods were cast off in the country. And there was also a very good infrastructure to induce currency trading. The spine of global investment and international trading is built up on Forex. Forex plays a vital part in supporting exports as well as imports to any country, without which, it would have been worse off. These imports/exports in turn will help in accessing resources previously untapped and create greater demand for services as well as goods. If you were the head of a multi-national company, your prospects would be quite limited and hinder growth. This leads to a stagnation or slowdown in the global economy.
Examples of a trade involving Forex
Let's take it that you are in the USA and want to play with the Euro. If you believe the Euro will rise in the future, then common sense indicates that you will buy Euros in exchange for Dollars based on the current exchange rates. However if you have some Euros in hand and think their value will decrease in future, you'll exchange them against the Dollar, thus making a profit. But however you should always keep it in mind that Forex trading is subject to a high risk of loss, the factors of which are beyond your control. Forex trading takes place round the clock and if you're financially savvy and buy/sell at the right time, you have a good chance of walking away with a bundle.
