Overview
Forex, short for foreign exchange, refers to
the world's foreign currency market. It is also known as currency
trading and is the process of exchanging one currency for another in
order to make a profit from the conversion. Forex is not just for
investors. About 5% of exchanges from one currency to another are
necessitated each day for commerce and international businesses. Whether
the exchange is done for standard reasons or for the purposes of making
a profit, it falls under the umbrella of foreign exchange or Forex
transaction.
How It Works
In currency trading, you exchange one currency to another and later convert the money back. The value of either currency would have changed during the time you held the currency. Depending on the value of either currency, you would have made a profit or loss when you change the money back.Investors speculate on the future value of currency. The idea behind Forex is the same as the idea behind purchasing stock. You purchase a stock and wait for its value to increase, so that you call sell it at a higher price and make a profit. With Forex, you are doing the same thing but with actual currency. For a simple understanding of the process, let us pretend you can exchange a single dollar for another currency in the market. You decide to go to Forex and exchange $1 U.S. dollar for Euros. Let the value of a Euro be $1. So you pay one dollar for one Euro. If you go to exchange the Euro back into dollars, and the exchange rate now is, $1 = .50 Euro, you have doubled your money, because that one Euro you have is worth $2. That is a simplified example, but shows how you can make profit in Forex.
Depending on whether or not the value of the currencies change, you could make a profit or lose money from the trading. Of course, you can trade in any currency and you are not limited to Euros and dollars.