The term foreign exchange refers to means of payment in a foreign currency such as the US dollar, the British pound, or the Swiss franc. Such foreign means of payment are required, for example, for vacation trips. This can be in the form of cash, i.e. coins or bills. However, most foreign exchange is not a means of payment in the form of cash, but credit balances in foreign currency.
Why invest money in foreign exchange?
Those who invest their money in foreign exchange can pursue various motives. Some are looking for protection against inflation. Other investors, on the other hand, want to diversify their portfolios with currency investments. The background is that exchange rates hardly or does not at all correlate with other asset classes such as stocks and bonds. That is, they develop independently of each other. According to modern portfolio theory, the overall risk of a portfolio can be reduced in this way. This is known as diversification.
Protection against inflation, speculation, and interest gains are the most important reasons for investing in foreign exchange. Thus, reading the forex broker review can provide you with vital information on how to be successful with forex trading in the long run.
Opportunity for currency gains
Most currencies fluctuate over time. As a rule, however, trends in the currency market are of a more long-term nature. That doesn’t mean, however, that there can’t be sudden distortions in foreign exchange.
There is always a chance of currency gains when the home currency devalues against the foreign currency, i.e. becomes less valuable.
With currency investments, the chance of currency gains is offset by the risk of currency losses.
This investing, also known as forex trading, is particularly popular with risk-taking investors. The trader expects a specific, mostly short-term trend in a currency pair and relies on this development with leverage.
Anyone who speculates with stocks or currencies has chances of high profits but also losses.
The starting point is certain currency-relevant events such as central bank meetings or economic figures. But technical chart signals can also be the trigger for currency speculation. The aim of forex trading is to participate in the expected exchange rate development with little capital investment, i.e. with leverage. The instruments used for trading are usually leveraged products.
How do foreign exchange rates affect a country’s economy?
For countries with strong foreign trade, exchange rates are an important factor for economic development. An export nation like Germany, for example, benefits from a falling or weak euro because domestic products are becoming cheaper for foreign customers, which in turn increases demand.