Understanding Forex Trading
Trading stocks is not the only option for investors who want to make money trading. Trading foreign currency is an option as well. The Foreign Exchange, or forex, is where the trading occurs. It is not a physical place, but a platform for foreign currency to be traded.
Understanding a few key terms can help you understand forex trading. An exchange rate is the value of one currency, expressed in the terms of another currency. If you are trying to determine the worth of the Euro, for example, you may describe it as how many US Dollars it is worth. Next, a currency pair is the two currencies making up an exchange rate. You are exchanging one currency for another. Another term is base currency, the first currency in a pair and the currency of an investor’s account. In contrast, counter currency is the second currency in a pair.
To picture a forex trade, think of purchasing 800 Japanese yen with 10 US dollars, if $1 US equals approximately 80 Japanese yen. Since the value of different currencies fluctuates on a regular basis, you could make a profit if the Japanese yen increased in value over the US dollar.
Either a broker or a market maker will place a forex trade after it is requested by an investor. A limited amount of people are allowed to actually trade on the floor of the NYSE (New York Stock Exchange). Therefore, different brokerage firms have people who represent them with seats on the NYSE and perform the trades for them. In contrast, a market maker is usually a company that holds shares in a company or a specific security and sells these to customers at a rate which they have more control over. However with forex trading, the market maker represents a country’s currency, not a company.