Forex or Foreign exchange is a 24hr (excluding weekends) market place that determines the exchange rate for global currencies. Fx, in comparison to the stock market, only requires a $100 minimum buy-in. Making it easier for young investors to enter the market.
Within the Fx, no currency moves in isolation. Currencies are always valued in relation to another currency – which is called a currency pair. For example, the AUD /USD is a currency pair that measures the value of the Australian dollar against the US dollar. In each currency pair, the first currency is the base currency, and the second currency is known as the quote currency. Now that the basics are covered let’s look at how traders buy and sell currency pairs on the Fx to make a profit.
Investors make a profit by predicting whether the price of one currency will rise or fall against another country’s currency. When investors believe that one currency will rise against another, they buy the stronger currency (also known as going long). Conversely, if investors believe the AUD would become weaker against the USD dollar, then they sell (also known as shorting) the AUD/USD pair.
For example, if you were to go long on the AUD/USD (0.674) pair, you are betting that the Australian dollar will rise in comparison to the US dollar. If the AUD/USD pair did increase to say 0.681, then you have made a profit. How much? Let’s say you invested 10,000 AUD. Initially, 10,000 AUD bought 6740 USD. However, now 10,000 AUD buys 6810 USD. Thus, making a profit of 70 USD (or $47.67 Australian).
Trading on margin refers to the amount of money the trader needs to enter an investment. The margin requirement is usually between 2-20% of the investment. To understand how a margin is calculated, let’s use the EURO/USD pair. Let’s say this pair is trading at 1.10, and an investor wants to buy 100,000 units. The total cost of the trade is 110,000. However, the investor only pays the margin, which let’s say was 3% (110,000 x3% = 3300). In this case, the margin, allows the investor to leverage 110,000 with 3300. Leverage is one of the biggest benefits of the forex market but is also one of the biggest risks as investors can potentially make large profits or losses.
Some of the top forex brokers in Australia include IC Markets, Easy Markets, and Plus 500. It is recommended that you familiarise yourself with each brokerage website, via the practice mode, in order to select the most suitable broker.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by associate Patrick Mclouglin