How Financial Trading Works
Have you ever heard of people trading currencies? Or, maybe you’ve heard of people trading on the FX market? Just hearing those phrases makes it all sound so complicated. But, in reality, trading currencies is not really any more complicated than choosing a stock investment. And that, I’m sure you’ve done at least once in your life.
So what do you do when you try to find a stock to invest in? Do you just do a random search on the internet and find something that has a cool stock symbol (for instance, Harley Davidson’s stock symbol of HOG)? I sure hope not! This was the method back in the late 1920’s, and we all know how that ended up…
No, when you choose a stock to invest in, you carefully study the history of the company. Has it been extremely volatile? How often has the company posted a net profit in the past four quarters? Are they involved in an industry that about ready to take off (like the medical industry or healthcare with the baby boomers)? Do they have a lot of debt compared to their current assets?
These are things that I would hope you would consider when choosing a stock. That, and of course the relative pattern of their stock price over the past few months or years. If they have consistently improved their stock price, it might be a great one to jump in on. Chances are that they will continue their growth and make you some money along the way!
Believe it or not, trading currencies isn’t much different. First of all, before we dive too deeply into the specifics, let’s gain an understanding of what it means to trade currencies. Just like company stock prices, the value of currencies go up and down as well (relative to other currencies). There are obviously many factors that contribute to the rise and fall of these prices, but let’s keep it simple.
Mainly, currencies gain or lose because of the strength that the country shows. If we, as Americans (in the USA), have a strong economy, there is a better chance that our dollar will rise in comparison to another weaker country’s currency. So, if we would have invested in our own currency, we would have effectively increased our earnings. While the concept isn’t all that complicated, I understand that it can initially be tough to grasp. For more information on financial trading click here.
Getting a bit more detailed (which may help your understanding), there is one more point that leads to the devaluation of currencies. You know how the U.S. government decides to flood the market with more money at times? Since this paper money is backed up by absolutely nothing, it essentially decreases the value of each one of our dollars (since there are now more dollars in the market with no extra real value within our nation), which then decreases our currency vs. another.
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