What is forex? This is a good question. There are so many websites and TV ads that mention forex these days. You probably know that it is a way that you can make money, but what exactly does it involve?
The word forex is short for FOReign EXchange. You may see it shortened even further to FX or 4X. It involves exchanging different currencies in the hope of making a profit when the exchange rates change.
A simple example can help to illustrate this. Imagine you were planning to travel overseas. Let’s say you are an American and you are planning a trip to Europe.
The currency of most countries in Europe is the euro, so you would want to exchange dollars from your bank for euros so that you would have some cash to spend while you are there. You might buy $500 worth of euros a couple of 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 money back into dollars and put it back in your bank. Now, in the two weeks that you had those euros, the value of the euro against the dollar will have changed at least a little.
Usually it doesn’t change a whole lot and because of the bank’s commission, you would find you get back less than your original $500. But if the value of the dollar really fell during that time, or the euro rose by a lot, you could 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 way to make money, that is a simple illustration. However, people who start forex trading do not do it by buying foreign currency bills from their bank.
They go on the internet and, through a broker, get involved in speculative trading where you can deal in sums 100 or more times larger than the amount that you have in your broker account. It’s a little like taking options in shares.
You don’t ever have the currency delivered, you just buy or sell according to whether you think the price will rise or fall, and then trade back out when you have either a significant profit or a loss.
Clearly, this is a risky business, but because you can deal in lots that are 100, 200 or even 400 times your own balance, it has the potential to make you a lot of money. This is what attracts most people to forex trading, and why knowing what is forex can be useful in the modern world.
