Forex Trading consists of one of the largest money markets developing in the world today. With an estimated $2 trillion circulating throughout the market, investors have a great opportunity to make large profits. However, these profits will not be made without taking a substantial risk required. The flexibility of the market to change rapidly is its greatest demise to most investors. The rapid fluctuation in currencies can yield immense profits, but also cause major losses.
How Forex Trading Works
This type of investing consists of purchasing certain currencies in hopes that that currency’s value in the global market will rise. Let’s suppose an investor purchases a given number of Euros in hopes that its value will increase throughout the year. If the EUR/USD (these abbreviations will be discussed below), which means the Euro/US Dollar value for a given time was 1.1935, which is called the “Forex Rate”, that would mean someone that wishes to purchase 1000 Euros must pay $1193.50 in US Dollars. Then later if the EUR/USD value increased to 1.2468, this would mean the buyer could sell the 1000 Euros for a value of $1246.80, leaving them with a $53.30 profit.
One would only invest in a certain currency that in short term or the longer term is expected or speculated to rise in value. This speculation of the market drives the investing and decisions for certain investment actions.
Forex markets are always fluctuating a great deal, and this attracts a large number of short term Forex investors looking for a quick, high profit opportunity. Some of the most attractive features of the Forex market includes a 24 hour free trading market with non-stop access to dealers, a massive liquid market offering nearly all currencies around the world, highly fluctuating markets for short-term profits, highly specialized and developed software for online trading, and various non-commissioned trading options.
The important decision here is whether or not to make an investment in this more risky venture, or to make an entirely non-risk investment such as a government bond. The only possible flaw in government bonds would be the possibility of bankruptcy, which is very unlikely. However the ROI or Return on Investment is much lower via this method, deterring many people from the non-risk investments.
Rates are exchanged in pairs because one currency is always exchanged against another, which defines the term exchange rate. Each country’s or Region’s currency is abbreviated by a 3 letter acronym. As above the US Dollar and Euro are abbreviated by USD and EUR, respectively. The first term indicated in the pair EUR/USD is the base currency, and the second is considered the quote currency. The base currency can be thought of as the denominator in the exchange and the quote currency as the numerator. Therefore if the EUR/USD value is 1.3429, then it would cost an investor $1342.90 to purchase 1000 Euros.
The Forex market can be an extremely profitable opportunity for investors, but at a potentially high risk. Only informed, educated Forex investors [http://www.forex-investors.org/] should attempt the market, but with recent online opportunities for people to create investment accounts, there is no reason to ignore this exciting market.