May 07, 2009

What is Forex Investing?

Almost any financial website these days (this one included — through the Google ads on the site) have ads for Forex investing/trading. I see them all over. In addition, I fight them quite often as it seems sites that are into Forex investing like to leave spam on other websites to increase their search engine rankings. But in all of this visibility for Forex investing, I have just one problem: I dont know what it is.

So I went to Google and found a couple of sites that educated me. Heres the first piece I ran into — from Yahoo — and their summary of Forex trading :

The Forex market is a non-stop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets and traders investments increase or decrease in value based upon currency movements. Foreign exchange market conditions can change at any time in response to real-time events.

The foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another.

The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc. and the need for trading in such currencies.

This piece, in particular, then goes into detail on how banks, hedge funds, and others can invest/trade in the Forex market. My very limited laymans viewpoint is that Forex trading is simply trading in currencies. Like with other investments, I assume that the goal is to trade when you expect your currency to increase in value relative to currencies you are selling (while others buying what youre selling are betting the other way.)

That said, how does an individual invest in the Forex market? And, the bigger question, why would anyone want to? It seems like its VERY speculative and akin to commodities — you can lose a TON real fast if you dont know what youre doing.

I bet there are some of you out there that know at least the basics of Forex investing. If so, please share your thoughts with the rest of us — Id love to hear your insights.