What Is Forex Investment: A Guide for Beginners

Forex, or FX, refers to Foreign Exchange. It works on the simple concept of exchanging one currency for another. Assume you have travelled to another country, converted your money to the currency of the country you are in and purchased something online – then you have participated in the forex markets.

This impact of Forex influences many areas of our lives, such as the price of fuel, food, imported goods, travel, and much more. As consumers, all of this foreign exchange takes place without our intervention.

The Forex market is a thrilling trading environment operating 24/5 and boasting daily trading volumes of trillions of dollars. It is by far the most significant and most liquid of all financial markets.

, What Is Forex Investment: A Guide for Beginners

Forex investment can be explained as a network of buyers and sellers who transfer currencies with each other at a mutually agreed price. It is also how individuals, companies, and central banks convert one currency to another.

While a lot of Forex investment is done for practical purposes, most of this currency conversion is done to earn a profit. The amount of currency converted daily can make the price movements of certain currencies highly volatile. This volatility is what makes forex an attractive investment option to traders as it comes with a high risk and high return profile.

The majority of the Forex investment is done between institutional traders, like people who work for banks, fund managers, and multinational companies. They don’t essentially intend or aim to own or take physical possession of these currencies. Instead, they speculate about or hedge against future exchange rate fluctuations.

For example, a person planning to invest in forex can buy U.S. dollars and sell euros if they believe the dollar will appreciate or strengthen in value, thereby allowing them to buy more euros in the future. Meanwhile, an American company with European business operations can use the forex market as a hedge in the event the euro weakens – this means that the value of their income earned there falls.

Unlike stock markets, in the Forex market, there is no centralised exchange or a single entry that supports the exchange of currencies. Simply put, the forex market is a global decentralized market where currencies are exchanged.

Forex trading is done “over the counter” (OTC) via a network of banks in different financial hubs around the world that oversee the market. This means that there is no physical exchange (like for stocks). The forex prices in the market change by the second, and computer networks facilitate efficient currency exchange rates.

The forex market is active 24/5 due to overlapping time zones of the four primary financial centres overlap being: (1) New York, (2) Tokyo, (3) Sydney & (4) London.

Here is a list of terminologies you should be aware of when getting started with or learning what is forex investment.

EURUSD

This represents the Euro / US dollar currency pair. The first currency (EUR) is the base currency, and the second currency (USD) is the quote currency.

Pip

A pip is a term that reflects the slightest change in the price of a currency pair. For example, if the price of the EURUSD changes from 1.0000 to 1.0001, then you can say it changed by one pip.

Bid/Ask Prices

In the Forex market, there are always two prices displayed, known as a Forex quote. In the image reference above, the first value (1.0000) is the bid price. It represents the price that the broker will pay a seller for the base currency. The second value (1.0003) is the asking price. It is the price at which the broker sells the base currency. Usually the bid price is always lower than the asking price.

Spread

The difference between the bid and ask prices will give what is known as the “Spread”. It represents the cost of a forex trade. In the given example, the spread equals 1.0003-1.0000=0.0003 or 3 Pips.

<h5Lot

A “Lot” is a unit of measurement. Forex is traded in lot sizes like Standard (100,000 units), Mini (10,000 units), Micro (1,000 units), and Nano (100 units).

Leverage

Leverage is like a loan option offered by retail brokers. It gives traders the convenience and opportunity to trade with much higher capital than they have. For instance, with $1,000 of capital and leverage of 100:1, you can open trades to the value of $100,000.

Margin

The margin is the amount of capital required to open a leveraged position in the Forex market. As for the example (leverage), $1,000 is the margin required to open a $100,000 leveraged position in the market.

This term represents the ratio of your account equity (capital) to the used margin. Generally, the higher the margin level, the healthier your account, and vice versa.

Position (Trade Position)

When you open a trade and it has exposure to the market, it is known as holding a position. When you learn more about what is a forex investment, you will often see descriptions such as “opening a position” or “selling a position”.

As with any other investment market, Forex investments are affected by forces of supply and demand. Here are some of the factors that can move forex markets.

The decisions made by central banks have a considerable influence on exchange rates. Events like interest rate hikes or cuts, quantitative easing, and other limitations can impact values in the forex markets.

News releases, especially those to do central bank updates, employment data, inflation, CPI data, GDP, and manufacturing data, represent major catalysts of significant price movements in the forex market.

This indicates a measure of how the majority of market participants feel about the market. Typically, a forex investment market can be bullish (rising), bearish (declining), or neutral at any given time.

Making the transition from understanding what is a Forex investment to how to start with Forex investments requires you to understand its benefits thoroughly. Here is why many professional and emerging investors see Forex as an ideal investment opportunity in these testing times.

Forex is the world’s largest financial market, which makes it highly liquid. This also means investors can buy and sell with ease and trade with tight spreads.

Money never sleeps in the Forex market. You can scan for forex trading opportunities round-the-clock, giving you more control over your investment decisions.

You can open much larger positions with less capital for more profit – earning potential.

No single entity can control, influence, affect, or corner the massive global forex markets.

In the Forex market, you only pay the spread. There are no additional commissions, such as brokerage fees or any other unnecessary charges.

With Forex, you can buy, sell, hedge, or implement any trading strategy of your choice.

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  • Basics of Forex
  • Forex Market
  • Terminology
  • Factors Affecting Forex Market
  • Why Invest in Forex
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  • Basics of Forex
  • Forex Market
  • Terminology
  • Factors Affecting Forex Market
  • Why Invest in Forex