Investing can be challenging for anyone, but the hardest part is choosing which route is best for you. Forex is a blanket term used to describe currency trading. Have you ever wondered how the value of the Euro or the dollar is determined? Financial institutions, governments, wealthy investors, and everyday people like you and I help value the currencies of the world.
If someone asked you, "how much is the Euro worth today?" how would you reply? You might say something along the lines of, "the Euro is worth X amount of dollars." This is the most common response because it's difficult to price a currency by itself; currencies are usually mentioned in terms of other currencies when determining their value. And the free market decides what these currencies are worth. If there is economic turmoil in Europe, then the free market may decide that the Euro should decrease in value against all other currencies. If the United States has hit its lowest unemployment rate in a decade, then the free market might decide that the dollar should become more valuable against other currencies.
This brings us back to our original question, "how is the value of a currency determined?" Currency brokers all around the world take orders from large corporations, banks, and everyday people and match them against existing orders to determine the value of the currency at that exact moment. Because a currency's value is determined by other currencies, in the Forex market people buy and sell contracts of currencies in pairs, such as EURUSD (Euro:US dollar). If you were to contact a Forex broker and ask him or her to buy a EURUSD contract, you would essentially be betting that the Euro would increase in value against the US dollar, because for one currency to increase in value another must decrease in value. If enough people buy the EURUSD contract, then the value of the Euro will go up and you would have made a profit. But, if you end up on the opposite side of the market and everyone decides that the dollar should increase in value, then you lose money on your EURUSD contract.
Forex is similar to the stock market because individuals are investing into something that they are hoping will go up (or down) in value. Just like in stocks, you can profit off a currency losing value by "shorting" it, or borrowing it and selling it at the present time and then buying it back at a later time. Simply put, your Forex broker will allow you to make a profit off the currency pair regardless of which direction it goes to -- you just have to make sure to pick the right direction; if you believe that the Euro will go up in value against the dollar, then you would "go long" or buy the EURUSD contract; if you believe that the US dollar will go up in value, then you would "short" or sell the EURUSD contract.
There are thousands of Forex brokers worldwide who will take your orders and in turn give you a contract that you can sell back at any time for a profit or a loss. The best part is that you don't need to have a lot of starting capital to get approved by most brokers. Many brokers will let you start an account with as little as $100 -- some brokers will even let you open a demo account so you can learn before you risk any real money!
First time traders are strongly advised to start a demo account before putting in any real money into their accounts. With Forex, you will be allowed to leverage your money. This means that your broker will allow you to stretch your dollar and buy larger sized contracts. In the United States you are allowed to have a 50:1 leverage, meaning that for every dollar you have in your account you will have the buying power of $50. So you could purchase a thousand dollar contract with just $20! But there is a downside to the leverage. If you pick the right direction of the currency pair, you might double your money in a very short period of time, but if you pick the wrong direction, you could lose all your hard earned money in an instant.
Forex isn't for everyone. It requires patience, mental and emotional balance, and an understanding of finance. If you believe that you have what it takes to become successful in the Forex market, then begin by purchasing a book or finding an online forum that will help you better understand the Forex market in great detail.