Currency Investing 101
If you’re looking to diversify your existing portfolio or just getting started in investment, foreign currency is a great way to go. Called “forex,” for short, foreign currency trading can become a little bit more complicated than trading in stocks or mutuals, but there’s no need to panic. We’ve got all the information you need to get you started in forex trading with no worries or stress. If you learn these basics before you wade in too far, you’ll have a good understanding to build on later in your investment career, whether you work with professionals like Oanda at https://www.oanda.com or not.
What IS Currency Trading?
If you’re really new to training in forex, you need to have a solid understanding of the concept itself before you can begin. Essentially, all you’re doing is buying one currency by selling another. These trades always occur in pairs: you have to exchange one currency to get the other. While you can trade any currency on the market for any other currency you wish, forex trading is typically done in the following pairs:
- Majors: the most frequently traded pairs.
- Minors: the second most traded group, excluding the US dollar.
- Exotics: this is the exchange of a major currency for a minor one.
- Regionals: currencies from the same region being exchanged for one another.
How Trades Work
While other trades take place on an exchange, like the New York Stock Exchange or the Nasdaq, forex trades take place through the foreign exchange market, which is presided over by official financial institutions. Money never sleeps, as they say, so this market is open 24/7, every single day of the year.
When trading currency, you have three different options for the kinds of trade you can undertake:
- Spot trade: the currency is only exchanged when the transaction is settled. This kind of trade offers the price of the currencies at the time of trading; the spot price.
- Forward trade: traders agree on a future date and a set price. The spot price is settled between them, and they are protected from any volatility that may occur at the time of the trade.
- Future trade: this kind of trade is similar to a forward trade, but if you take on a future trade, you’re legally bound to go through with the deal.
Once you’ve settled on the kind of trading you want to do, you need to figure out if you wish to buy or sell. When you buy a pair, you do it with the expectation that the base currency will increase in value. When you sell a pair, you’re actually buying and selling because you sell the base currency and purchase the quote currency. You do this in the hope that the base currency you sold will decrease in value, meaning that you can buy it back at a lower cost.
What is “Bid and Ask”?
If you’re going to trade forex, there’s something else you should know; a system called “bid and ask.” Bid in this situation means the cost of the foreign currency pair, and ask refers to the price that a broker asks for a given currency. The difference in cost between these two prices is referred to as the “spread.” While a numerical representation of this concept might look complicated and overwhelming at first, if you take a second to look back on what you’ve just learned, you’ll be able to interpret the numbers as easily as you would read this sentence.
Why Should You Invest in Forex?
Forex is an excellent investment for a number of reasons. The top three reasons are
- Forex is convenient and easy to access. While the Nasdaq or NYSE might operate only during their working hours, you can access forex trades at any time. If you’re starting out and only have your free “after work hours ” to trade in, you’ll be able to make the trades you want to.
- Diversity. If your portfolio contains only one kind of asset, you’re incredibly vulnerable to potential risks. If you add forex to an existing stock portfolio, you’re more insulated against any crashes that might occur.
- Accessible cost. Trading in stocks can often become very costly due to the commissions you’ll need to pay, while Forex trades don’t have as many costs associated with them.
Final Word
If you grasp these basics that we’ve laid out, you’ll have no trouble at all moving ahead and getting yourself well set up in the market.
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Source: Vietnam Insider