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Most people consider the stock market to be the biggest, baddest beast out there for making a lot of money. In their minds Wall Street towers over the investment world like Godzilla, roaring its challenge to take on all comers. What a lot of investors might not know is that the stock market is a little kid playing make believe when compared to the actual monster that is the foreign exchange market (typically shortened to just Forex). Bigger, badder, and with a lot more money-making potential than even the best stocks, the foreign exchange market has been drawing new investors in record numbers.

But how does it work?

How The Forex Market Functions

The foreign exchange market operates off the changing exchange rates between different currencies. In practice it's pretty simple. Say that on Tuesday the exchange rate between the U.S. dollar and the British pound is $2 for every 1 pound. A Forex trader spends $100, and now has 50 pounds. By Friday the exchange rate is now $5 for every 1 pound, and when the trader converts the pounds back they're worth $250. That's a $150 profit just for shuffling some money around into a different denomination.

That's kind of how this investment works. The money isn't actually going anywhere, it's just changing forms and hopefully getting bigger as it changes.

Is It Really That Simple?

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Yes and no. The mechanics of investing in foreign currency are simple. The problem lots of investors find is the exchange rates rarely change as drastically as those used in the above example. While there are always fluctuations between currencies those fluctuations might be as little as a few cents, or a fraction of a cent. This leaves Forex investors with two options; wait for big changes, or invest a huge amount of money so that even small changes result in a worthwhile payout.

Let's say that instead of changing by $3 that the difference between the dollar and the pound only altered by 2 cents. Changing one's pounds back into dollars would only result in $1 or so of profits. But what if someone had 1,000 pounds? Or 10,000 pounds? A million pounds? With numbers that big even a few cents this way or that can make a lot of difference in the final total.

How Do I Choose The Right Currencies?

In a word, experience. Forex is at least as complicated as the stock market, and the changes in currencies can sometimes seem arbitrary and confusing. Changes in currency value can be spurred by political upheavals, natural disasters, technological innovation, war, and a huge number of other factors. Individuals who want to make the best picks should educate themselves on what causes currencies to change, what trading methods work best for making steady gains, and how to recognize trends in the market. Those who have money to invest but who lack expertise can also contact a Forex broker who will present action plans to you and explain why something is a good opportunity before investing your money in it.

Forex Trading Tips

It's always better to be safe than sorry when it comes to investing. For that reason it's important for Forex traders to set a budget of acceptable losses, and to never throw more money than that into a trade. Going along with this tip investors need to make decisions based on charts and data rather than on emotions. Emotional investing can lead to big payouts, but it often leads to huge losses as well.

Lastly always take "guaranteed" Forex investing with a grain of salt. This is particularly true of all the systems out there, from automated Forex trading robots to advice from experts you've never heard of. There are more scams about Forex than can easily be counted, so make sure you check a person's bona fides before agreeing to put advice to use in your own portfolio.

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If you enjoyed this article you might also want to do some further reading about Individual Retirement Accounts (or IRAs). Learn what they are, how they work, and the benefits of having one of your own.

Also, in case you were curious here's the reason we no longer use the gold standard.