CommexFX, a leading forex trading company, offers a brief overview of the misunderstood world of currency exchange. This highly lucrative, yet truly foreign field of investment is a mystery to casual investors.
How may people have returned home from a vacation abroad and wondered what to do with the “extra” euros, pounds or yen they found in the bottom of their suitcase? Typically, the foreign currency is tucked away in a special place for the next time they venture abroad. Some savvy investors have found a way to profit from the fluctuations in slue between foreign currencies.
CommexFX Explains Forex Trading
In the early 1900s, converting currencies from different countries was a risky and speculative transaction, usually done by multi-national companies in concert with large trading houses. Smaller sums–anyone got change for a million?–usually ended up in a barter exchange where products or services would be given instead of money. These products would then be sold and, with luck, the company or individual would recover their money.
All this changed after WW2 with the introduction of the Bretton Woods Accord, which pegged all government currencies to the US Dollar (USD). Now, in addition to being given a universal rate of exchange on every foreign currency, the possibility opened up to trade the actual currencies themselves. With Europe in tatters this single Accord was a driving force in the reconstruction of war devastated communities and infrastructure.
All that Glitters is a Gold Standard
At the same time, the value of the US dollar was tied to the price of gold, which, at the time of the Bretton Woods Accord, was valued at $35 an ounce. The U.S government was obligated to maintain gold reserves equal to the amount of currency in circulation, making the United States a true gold standard economy. The idea was by linking the USD to gold and all currencies to the USD it would create stable financial markets for trade.
While Bretton Woods did create stability it also had unintended consequences for both foreign governments and the US. Countries did not like being “tied” to a USD, which hampered their ability to address local financial problems, and the US was stuck with a dollar that rose with the price of gold. This made foreign countries unable to set their currency and the US with a dollar that made trade more expensive.
Inflation: The Real ‘70s Show
In the early ‘70s, energy prices began to skyrocket and with it newly flush Petro-States such as Saudi Arabia and Iran opted to buy gold instead of the USD, which created an inflationary pressure on the USD. Unable to control the rise of their currency, the US made a decision to drop from the gold standard. The USD would now be pegged at 1/35 an ounce of gold. Inflation slowed down but opinions vary as to the overall cost.
Against this backdrop Forex Trading (Foreign Exchange Trading) began in earnest with two main branches: Interbank and Over The Counter (OTC) trading. Interbank trading consists of a small group of banks that exchange large amounts of currency for financial, energy, and other industries. You need a lot of money to get into this so most traders speculate on the OTC market.
It Takes Two to Tango
Forex trading in the OTC market is not conducted in a physical location such as a stock exchange and is essentially a contract between two parties. If a buyer wants to purchase dollars (USD) with British Pounds (GBP), the trader buys a GBP/USD pair. They are buying GBP at the same time someone is selling USD.
The first country in the pair (GBP) is called the base currency; the second country (USD) is called the quote or counter currency. When selling a currency pair, the exchange rate shows how many units of the quote currency you will receive when selling one unit of the base currency. In this example the calculation could be GBP / USD = 1.642 which indicates one pound can buy 1.642 US dollars.
CommexFX Deems Forex Virtually Unstoppable
Currencies fluctuate based on a number of factors most notably economics and political instability. A poor financial result or terrorist act in a country for example can cause a currency to swing wildly separate from the underlying strength of the currency. In a national tragedy such as 911, fortunes can be made and lost.
According to CommexFX, the rise of Internet trading has given investors the chance to manage accounts from the comfort of their home or office. This has resulted in more people entering the market and more trades being made daily. As they say, “in for a penny…until you buy a pound.” CommexFX provides a tantalizing alternative for travelers the next time they come home with those “extra” foreign currencies: Forex.