What’s forex? This is a good question. You almost certainly know it’s a way that you can make money, but what precisely does it involve?
The word forex is short for FOReign EXchange. You can see it shortened farther to FX or 4X. It involves exchanging different currencies in the hope of making a return when the exchange rates change. A simple example may help to illustrate this. Imagine you were planning to travel overseas. Let’s say you are an American and you are planning a visit to Europe. The currency of most countries in Europe is the euro, so you would want to exchange USD from your bank for EUR so you would have some cash to spend while you are there. You might buy $500 worth of euros two weeks before your trip.
But then, something comes up at the last moment and you cannot go to Europe after all. So you change the cash back into dollars and put it back in your bank. Generally it does not change a whole lot and thanks to the bank’s commission, you would find you get back less than your original $500. But if the value of the dollar actually slid in that time, or the EUR rose by a lot, you might end up getting back more than $500. Then you would have made a profit from currency exchange.
So when we look at what is forex as a method to earn money, that is a easy illustration. Nonetheless folk who start forex trading don’t do it by purchasing foreign currency bills from their bank. They’re going on the web and, thru a broker, get involved in speculative trading where you can deal in sums a hundred or even more times larger than the amount that you have in your broker account. You do not ever have the currency delivered, you just purchase or sell according to whether you suspect the price will go up or go down, and then trade back out when you have either a major profit or a loss.
Obviously, this is a dodgy business, but as you can deal in lots that are 100, two hundred or maybe four hundred times your own balance, it has the ability to make you a lot of money. This is what draws most people to foreign exchange trading, and why knowing what is foreign exchange can be handy in today’s world.