Currency investment, or the forex trade, makes for the most expansive trading market in the world. You might not know it if, like many people, you focus your own investing efforts on the LSE or FTSE. But around the world, the currency trade is incredibly active.
This can make it an intriguing alternative for people looking to diversify their holdings. In past tips for getting started with investment, we pointed out that you shouldn’t put all your eggs in the same basket.
It’s important to spread investments out over a variety of assets, so that there’s less chance of any one of them harming your accounts. However, we also stressed that you shouldn’t invest in any product you don’t understand.
In keeping with the second notion, we’re going to provide some basics about currency investment so that those who are interested in it can begin to understand it.
How Does Forex Work?
In a phrase, forex trading is the purchase and sale of currencies to profit on their value against others. More to the point though, forex works through the purchase and sale of currency “pairs.”
A pair simply denotes the relationship between two currencies.
So, for example, the pair listed as “GBP/USD” signifies the British pound’s relation to the U.S. dollar — and specifically, how much the pound is worth in dollars (whereas USD/GBP would show how much the dollar is worth in pounds).
When you buy a pair, you are essentially speculating that the first currency listed will increase in value relative to the second; when you sell, you’re anticipating the reverse. So, a successful transaction might see you purchase GBP/USD at, say, 1.2540 and sell it at 1.2545.
Where Can You Trade?
We won’t recommend one trading platform versus another, but we will point out quickly that forex trading occurs separately from stock exchanges.
There are both large financial institutions and independent trading platforms, however, where you can set up an account and trade currencies in a similar fashion to how you would deal in stocks.
What Are GBP’s Pairs?
To be clear, when you trade currency you’re able to trade any pair that is listed at your chosen platform. Your native currency is not a factor.
With that said, it stands to reason that many who explore forex investment from the UK will be drawn first to currency pairs involving the pound.
The most high-profile option is trading the GBP/USD pair, which is one of the oldest and most traded currency pairs in the world.
It’s among a small handful of forex pairs that essentially lead the market, and is the source of an immense amount of investment on a day-to-day basis.
With that said, GBP can also be traded against most other currencies of note, with EUR/GBP, GBP/AUD, GBP/CAD, and GBP/JPY representing some of the most active pairs.
What Moves the Market?
In any new investment, it’s important to understand what factors will move the market one way or the other. In this case, that means getting a feel for what influences the value of any given currency.
Internally, the factors that influence currency value are actually quite straightforward. They include a nation’s economic performance, its inflation rates, and any manipulation of interest rates that is done by central banks.
More broadly though, there are also some factor relating to international relations that can have a bearing on the forex markets.
For instance, geopolitical conflicts and trade disputes can influence the economies of the nations involved, and by extension the values of their currencies. These are all things to keep a close eye on if you’re looking to enter the forex trade.
Are Non-Traditional Currencies Involved?
In 2020, more than in recent years, the question of what actually qualifies as a currency is a fair one to ask. For instance, many might expect to see options like bitcoin included in the forex market.
Somewhat similarly, China has now introduced a digital currency that some view as a potential trendsetter that will lead nations to replace their money with digital assets.
As of now though, none of these alternative assets strictly qualify as forex assets. That may change if it comes to be that nation-backed digital assets are in fact replacing their ordinary currency.
Practically though, there might still not be a difference; a digital Chinese yuan and a conventional one would likely be indistinguishable as forex assets.
So there you have some of the basics! There’s plenty more to learn before you actually start investing in currency, but the information here should provide a solid foundation.