What is forex? This is a difficult question. There are such a lot of sites and television advertisements that mention forex these days. You probably know that it is a way that you can make money, but what exactly does it involve?
The word forex is short for FOReign EXchange. You can see it shortened even further to FX or 4X. It involves exchanging different currencies in the hope of making a profit when the currency rates change. A simple example can help to illustrate this. Imagine you were planning to travel overseas. Let’s imagine you are an American and you are planning a visit to Europe. The currency of most countries in Europe is the euro, so you would wish to exchange dollars from your bank for EUR so that you would have some cash to spend while you are there. But then, something comes up at the last moment and you cannot go to Europe after all. So you change the cash back into USD and put it back in your bank. Now, in the 2 weeks you had those euros, the value of the euro against the dollar will have changed at least a little . Generally it does not change a whole lot and thanks to the bank’s commission, you would find you get back less than your original $500. But if the value of the dollar truly fell during that time, or the EUR rose by a lot, you could end up getting back more than $500. Then you would have made a profit from currency exchange.
So when we look at what is foreign exchange as a way to make cash, that may be a easy illustration. However, people who start forex trading don’t do it by buying foreign currency bills from their bank. It’s a little like taking options in shares.
Obviously, this is a dangerous business, but because you can deal in lots that are one hundred, two hundred or maybe four hundred times your own balance, it has the capability to make you a lot of cash. This is what attracts most of the people to currency trading, and why understanding what is forex can be handy in the modern world..