Basic Concepts for the FOREX Market
The world economy is driven by international trade, but nations across the world use different currencies to buy and sell goods and services. Importers must exchange their domestic currency into foreign currencies to purchase foreign goods. The foreign exchange or FOREX market, is the market for world currencies. Some investors buy and sell world currencies (known as FOREX trading) in an effort to earn profit.
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Exchange Rates
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Exchange rates are key to FOREX investing. An exchange rate is the rate at which a certain currency can be traded for another currency. For instance, if you can buy half a British pound for each U.S. dollar that you hold, the exchange rate of U.S. dollars to pounds is 1-to-1/2. Every currency has its own set of exchange rates that can go up or down over time. For instance, if the U.S. economy went into a depression, the value of the dollar might fall relative to other world currencies. The goal of FOREX investing is to purchase a certain currency and then exchange it back for the original currency at a higher exchange rate.
Buy and Sell Rates
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Institutions like banks that exchange foreign currencies often charge markups on their exchange rates by offering different rates for buying and selling currencies. For instance, a bank might sell Euros at a rate of one for every $1.50 and buy Euros at a rate of one for $1.45. In this case, for every Euro that you buy and then exchange back for dollars, you lose 5 cents.
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Options and Futures
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Options and futures are two common types of investment contracts used in the FOREX market. Options are contracts sold by one party to another that grant the buyer the right to purchase a given amount of an asset at a certain price at some future date (the buyer is not obligated to buy the asset). For instance, an option might entitle the buyer to buy $10,000 for 6,000 Euros in one month. Futures are similar to options except that the buyer must purchase the assets specified in the contract at the given price and on the specified date.
United States Commodity Futures Trading Commission
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The United States Commodity Futures Trading Commission is an organization that regulates trading of futures and options in the United States. The agency states that FOREX investments can be highly risky and that FOREX investors are sometimes defrauded out of their money. FOREX trading is never risk-free; any investment opportunity involving FOREX that claims very high returns with low risk or guaranteed returns may be a scam.
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