Ever see the end of FOREX trades on the currency markets on the news? Most of the time, they are based on how each currency traded against the dollar. The Foreign Exchange market is what is meant by the term "FOREX." FOREX is a market where people from all over the world trade the value of their own currencies. In the 1970s, currencies that had been tied to the gold standard, or the price of gold, were untied and allowed to float. This was the start of the currency market we have today.
So instead of a dollar's value being based on gold, it is now based on how much other currencies are worth. FOREX can be a paradise for investors because it's as close as you can get to a free trading market. Since FOREX is just trading one currency for another, almost anyone can do it.
How does this work, then? Let's say you think that inflation will hurt the US market. That is, the value of the dollar is going to go down over the next year or so, and all of your $100 savings are in US dollars.
One way to trade the FOREX is to trade your savings in dollars for a currency like the EURO that you think will be more valuable or stable. Let's say that one dollar is worth two Euros for this example, but remember that this is just an example. So the trade is 100 USD for 200 EUR.
Next, let's say you're right and the US does have a lot of inflation and the dollar loses 10% of its value. Be aware that when we talk about money, we're not talking about how many dollars or other currencies there are. Instead, we're talking about how much those currencies are worth. That is, how much it can buy or how much it is really worth.
So, if you kept your savings in US dollars, they would be worth only 90% of what they were worth a year ago. But because your savings are in EUROS and the market for those has stayed stable, the WORTH of your savings has been protected. Because of inflation, the FOREX trading markets will change the value of the dollar and raise the value of the Euro to make things fair. So, a US dollar would be worth about 1.8 Euros in this case.
To finish the example, you could turn your 200 EUR savings back into US dollars. But because of inflation and a drop in the value of the dollar, you can now get about 110 US dollars for your 200 Euros.
Almost anyone can invest in FOREX, and there are strategies for those who want to make money quickly and those who want to make money over the long term. Those of you who are interested in trading foreign currencies should start by getting good training and learning about the markets. Unlike the private markets where stocks, bonds, and commodities are traded, FOREX is currency that belongs to each country's government. Governments often change the value of their currency, and the decisions they make can have a big effect on the value of their currency.
Even though a lot of people and currency dealers make it sound easy, the only thing that's easy about investing is losing money. It's important to keep in mind that currency dealers usually make money through commissions, not from the investments they sell. Even though the example we used above was very simple, there were some risks and extra costs we didn't think about. Things like the cost of trading and the idea that one government kept its currency completely stable, which isn't usually the case, while another didn't.
Many people who work with FOREX say that trading currencies is a good way to make a lot of money. Obviously, they're right, but you can also lose a lot of money. So get training, learn the markets, and trade wisely.
