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The following guest post is courtesy of freelance writer Brad Richardson, founder of website littlestbookshelf.com.
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It can be overwhelming for a newbie to think about investing and trading on the stock exchange, but it can also be very lucrative and exciting. When I first started investing my hard earned money in companies listed on the stock exchange, I had no idea what I was doing. I borrowed money from my savings account and flung it into a company on the stock exchange and lost half my money. It could have been worse. Actually, many people lost all of their investment in this one particular company, who ended up pulling off the stock exchange and reverting back to a private agency. But the lesson I learned was that investing and trading wasn’t scary; it was just unknown to me. So I did some research about it and felt better for the next kick at the can. In my research, I learned that there was also a market for exchanging currency, called the Foreign Exchange Market, or Forex as it is commonly referred. This is the place where money changes hands and dollars go up, and dollars go down. Let’s look at what Forex is from a beginner’s point of view.
Why is Forex important to everyday people?
The groups working in the Forex are the big banks of the world. This is how the banks determine exchange rates for the day. Other groups include insurance companies and investment companies. People like you and me, and guys like James May can engage in importing and exporting goods, especially things like foreign cars or other products, because of the ability for the money to exchange properly, thanks to the Forex. By clients paying in Euros, Americans can receive American dollars for products or services rendered. All thanks to the Forex.
How Does Foreign Exchange Work?
When you go to your local banking institute and ask to “buy some currency” for another country, there is a rate at which that currency can be purchased. The bank does not set the rate. The Foreign Exchange Market sets the rate. Depending on what is happening in the world – wars, poverty, natural disaster – these rates can fluctuate quite a bit between day to day. Canadians frequently watch the foreign exchange market value for their dollar because it is so “low” in comparison to the American dollar. While the American market looks to the Canadian market to import goods because they can get up to 30% better pricing when the Canadian dollar is weaker. In a nutshell, the Forex tells the world what their money’s worth on any given day.
An interesting fact about the Forex is that it does not process exchange rates on the weekends; given that banks aren’t typically open on weekends anyway, this should come as no surprise, however, if you make a purchase online with your credit card from a foreign seller, you will get the exchange rate last posted before the market closed on Friday of the same week. For the average Joe, the Forex comes into play when they want to exchange currency for travel or purchase some goods from another country, so it can be quite simple to interact with even without knowing a lot about it.