For a person to truly diversify his or her assets, a person needs to look into investments of all types. Something often overlooked when a person makes an investment is the foreign exchange market. The foreign exchange market, or Forex for short, is built very similar to the stock market, and a lot of the principles that apply to buying and selling on the stock market apply to the foreign exchange market.
How does it work? The biggest difference between the stock market and the Forex market is that in the Forex market, a person doesn’t simply bid on one type of stock. In the stock market, a person simply picks one symbol, invests, and waits for that one stock symbol to move up or down. In the Forex market, however, a person bids on a pair of currencies. This means that a person is investing money on the assumption that one country’s currency’s value will increase or decrease relative to the other’s.
This may sound complicated, but here is how it works. Say a person has been paying attention to the global market, and he or she has a feeling that the Australian currency is about to increase in value relative to our American currency. That person would invest in the AUD/USD currency pair and if the value of the Australian dollar goes up relative to the value of the American dollar, or the value of the American dollar goes down relative to that of the Australian dollar, then that person stands to make a profit.
A person also needs to watch the spread when purchasing currencies on the Forex market. What is a spread? It is the difference between the ask price and the bid price. For example, if the bid price of a currency is 1.2242 and the ask price is 1.2246, there is a spread of.0004 units. The higher the spread, typically, the more movement the underlying currency pair must undergo in order for the trader to break even.
The one important term a person also needs to learn when it comes to Forex trading is that of the “pip.” The pip is the smallest numerical unit in which a currency will change. Basically, a pip is almost equivalent to the measure of precision of the decimal place. For example, if a currency pair is trading at 1.04, then a pip is.01 for that pair. If the currency pair is trading at 1.0006, then a pip is.0001.
There is quite a bit of opportunity for profit for a person willing to go out there and risk a little bit of money with Forex trading, and if a person pays attention to global economies he or she can build part of their portfolio with currency exchange. The Forex market is not for everyone, but for a certain type of person, there is a huge opportunity out there.