What is FOREX? Part 3

 When investors invest in a company, they buy the company's stock and when an investor invests in a country, they buy that country's currency.

Countries are in effect traded on the FOREX very similar to how companies are trading on Wall Street.

If you are buying a company, some of the attributes you might look for to base your decision would be:

1. A good product and production capabilities
2. Stability
3. Good strong management
4. A good potential return on your investment

Generally this is what big investors of foreign currency are looking for when they decide to invest in a country's currency.

Just like when a company issues quarterly reports that often affect the value of its stock, almost every trading day there are various types of economic reports being released by a country that can have an effect on the value of the country's currency.

Some traders "trade the news" buying or selling currency based on news and economic reports but we'll save this subject for another lesson.

With FOREX the countries are compared to each other for example a strong economic report coming out of the USA might cause the dollar to rise in value against the EURO.

 When you trade the EUR/USD currency pair for example, you would enter the trade believing that the US Dollar ( The USA's "company stock" ) is going to fall or rise in value compared to the European Euro.

The value of a countries currency is always rising and falling in relation to the currency of other countries.

Once again one of the simplest ways to understand the FOREX is to think of it as a huge exchange of which the currencies of most countries in the world are bought and sold.

Many find trading currency much more attractive than trading stocks for the following reasons:

• Focused Attention - When you trade stocks, there are literally tens of thousands of companies to choose from when trying to decide which ones to invest in. That is a lot of information to assimilate and keep track of. With the Foreign Exchange the number of choices is dramatically reduced making it much easier to concentrate on trading. While many countries are traded, there are five main players in this global arena...

The United States (USD)
The European Union (EURO)
Great Britian (GBP)
Japan (JPY)
Switzerland (CHF)

• Liquidity - Because FOREX is literally the biggest "market" on earth, whether you are entering or exiting, getting your order filled is almost instantaneous which is not always the case with stocks.
• Profit Potential - You can open a currency trading account for less than $500 but the profit potential is greater than stocks, with FOREX you can profit regardless of whether or not the value of a currency is rising or falling.
• Convenient - The FOReign EXchange is open for business 24 hours a day, 5 days a week offering trading opportunities for even the busiest people.
•  Ample Trading Opportunities - Because the currency process are always fluctuating up and down, there are plenty of trading opportunities.
• FREE Trading Aids - There are plenty of free trading resouces for anyone that wants to trade currency. Check out the resources section of this site to learn more.
• Practice Account - You can open a practice account with most brokers that allow you to "play" with cyber cash until you are ready to trade real funds.

The next tutorial will teach you how to read a FOREX chart.

<<< What is FOREX? Part 2                    How To Read FOREX Charts >>>