Investment 101: Why Engage in Forex Trading?

One good thing about being an investor is that there are so many options to look at.

For instance, you can invest your money in stocks, from which you can earn a steady stream of income from periodic dividends from the issuer you’ve bought them from. Stock ownership has proven itself to be one of the best ways of earning long-term residual income, especially for people who are retired or are preparing to retire from the corporate world.

However, as you’ve already read before in this blog, there are many other avenues of investment you can put your money in. We’ll slowly discuss those as we release more blogs into the future, but for now, we’ll focus more on foreign exchange trading.

What is Forex Trading?

Long before this world has become embroiled in global trading, foreign exchange has already set itself up firmly in the financial landscape. The rate of exchange between two currencies is one of the most followed news in investment circles, because these can also drive prices in commodities and even services that are imported between two countries.

At the heart of this exchange is the ratio. Let’s say that you can buy one Euro with $1.50. That’s the ratio of the exchange, with Euro being the “base currency” and the US dollar as the “quoted currency.” Now, the ratio will rise and fall, like anything else in an inherently volatile financial market.

This is where you can earn your bread as a forex trader, in the future. You leverage on the possibility that the ratio will increase, so that the actual value of your investment will also increase. Basically, you’re banking on gaining profits from the effects of the price increases on your investment.

An Overview of Forex Trading

Let’s say you have $1,500 on hand. Building up from the example above, that buys you 1,000 Euros. So, you decide to invest that money on that currency pair. You go through the requisite processes and, at the end of that, you get your 1,000 Euros worth from your investment.

You closely monitor the movement of the market. At some point in the day, the ratio between the Euro and the US dollar is now 1 Euro: $2.50. Let’s do the math and see what happens to your investment.

The price of one Euro has risen $1.00 at that point, so it means that you’ve earned a profit of $1,000 on your investment at that point. You’ve bought 1,000 Euros for only $1,500 but people will have to pay $2,500 now in order to get stocks of that currency at that amount.

The price difference is what you gain profit from, so what you do is to simply multiply $1.00 by 1,000 because you have 1,000 Euros in your account.

Like most forms of investment in Thailand, you will still need to identify exit points at which you’ll sell your holdings in order to realize the profit. That example above illustrates an ideal exit point, but it depends on you if you want to jump to that opportunity.

Others will want to wait a little bit longer, but it depends on how you read the price movements using specialized tools that traders use.

In the next article, we will touch on how you can select the right broker for investing in foreign exchange so stay tuned.

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Photo credit : The Digital Way

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