Countries worldwide dealing in trading using various kinds of currencies gave rise to the term, Forex or Foreign Exchange. It can also be used for traveling to a foreign nation. In case there would have been a common currency used across the world, ever wondered what would have happened? The main drawback would have been in managing all the nations’ economic systems through a single organization. Besides, if there would have been an economic recession in any one of the countries, it would have affected other nations’ financial structure. That was the critical reason for bringing foreign exchange into the picture. Let us discuss this in detail.
The Tit-Bits Of Foreign Exchange Trading
Foreign exchange trading involves the purchase and sale of currency pairs for the sake of gaining profits. The profit is achieved through the change in the currency rates in different nations. The revision of interest rates, the financial reports of a country, inflation rates, etc., can be the factors that lead to an increase or decrease in the currency value. There are several benefits of forex trading that you should know.
In Forex, the currency rates are mentioned in pairs. For example, in the case of USD/EUR0=0.8245, a dollar’s value is equivalent to 0.8245 Euros.
Some Terms Used In Foreign Exchange Trading
The above example of USD/EUR will be used to understand the simple terms used in trading in foreign markets. It must be noted that financial institutions like IMF and banks like HSBC act as brokers in transactions of foreign exchange.
- Bid Price- The price at which a broker is interested in bidding to buy the US dollars. In case you wish to sell the US dollars, and you have to do that at 0.8245 Euros per dollar.
- Ask Price- The price at which a broker is interested in selling (or asking for the price) to sell dollars. For purchasing a dollar from the broker, you have to buy at 0.8245 Euros per dollar.
- Bid-Ask Spread- It is the difference between the asking price and the bid price.
- Pip(Point in percentage)- The tiniest change in the price value is known as the pip. The fourth digit after the decimal in the quoted price refers to the pip. For example, ‘5’ is the pip value in USD/EURO=0.8245.
- Leverage lets you trade at a more excellent value by investing a small amount of a currency. Influence is mostly represented as a ratio. For example, a 10:1 leverage ratio will help you trade 10,000 EUROS by an investment of just 1,000 EUROS.
Forex demo account trading has increased primarily due to the liquidity in the financial market, the use of leverage in trading, etc. With these bright facets comes along the risk involved in foreign exchange trading. Some of these risks can be exchange rate risk, interest rate risk, etc. To make a wise choice in foreign exchange trading, it is recommended to hire an experienced mentor to guide you regarding making profitable investments.