What are foreign currencies? – Definition and examples
Foreign currencies are basically foreign means of payment or currencies . Examples are the euro (a means of payment in several European countries), the US dollar (the currency in the USA) or the Turkish lira (the means of payment in Turkey).
GOOD TO KNOW:
Strictly speaking, foreign exchange is only understood to mean a credit balance in a foreign currency – i.e. securities, money substitutes such as checks or money in foreign bank accounts. Cash, on the other hand, is not referred to as a currency; there is a separate term for this: banknotes and coins in another currency are called sorts. Only when cash is deposited into a foreign currency account is it considered a currency.
How can you trade forex?
You have certainly already encountered foreign currencies on vacation if you have made cashless payments in a foreign currency. Apart from that, currencies are also a form of financial investment: they can be traded. Regulated trading is possible on the so-called foreign exchange market , also known as Forex (Foreign Exchange). Business runs around the clock, regardless of a stock exchange location, via computer systems. Often these are traded between 2 financial institutions (banks). Forward transactions in foreign currencies are also often carried out using this so-called interbank trade. In addition to the banks, companies, states, brokers and institutional investors are directly or indirectly among the market participants.
For private investors , trading via so-called “Forex brokers” is possible indirectly. With these brokers, contracts on foreign exchange can be traded. Alternatively, you can get into the forex business with special software without these external services. However, you cannot purchase these directly, you can only exchange them for another currency. How come? Trading always takes place in certain currency pairs. B. exchange for Canadian dollars, Swiss francs, New Zealand dollars, US dollars, Australian dollars or British pounds. In order to make a profit, the exchange rate fluctuations of foreign exchange are exploited with the foreign exchange speculation. However, this can be very risky: Losses or even total loss are possible.
Investments, warrants and currency certificates
In addition to direct investment in a currency and foreign exchange speculation, there are other options for entering into or trading in foreign exchange transactions. You can use your money e.g. B. invest with government or corporate bonds in foreign currencies. With currency certificates and warrants , you can bet on rising or falling rates of a currency without actually having to buy it. Another option are contracts for difference (CFDs) , with which you can speculate on the price development of a currency at short notice.
Forex trading: opportunities and risks
Investing money in foreign currencies harbors various opportunities and risks. If you decide to invest in this area, you should keep these in mind:
Foreign exchange offers these opportunities:
- The purchasing power of one’s own financial assets can be preserved by exchanging for another currency if one’s own currency devalues significantly
- Forward exchange transactions offer the possibility of hedging exchange rate fluctuations
Possible risks of foreign exchange:
- An unfavorable exchange rate development can result in losses when exchanging the foreign currency
- Trading is highly speculative and the foreign exchange market is quite confusing: total losses are possible
What are foreign currencies: How are foreign exchange rates created?
The course is determined by several factors. However, it is primarily based on supply and demand on the currency markets. Other factors can include:
- Demand for means of payment
- Price level and goods
- Inflation and economic development
- Central bank key interest rates
- Speculations and expectations of market participants
Foreign exchange rates and exchange rates – what’s the difference?
In everyday life one is more often confronted with the term “exchange rate”. For example, if you are visiting a foreign country with a different currency and need to exchange your money. But what is the difference between exchange rates and foreign exchange rates?
The exchange rates for exchanging cash are often slightly worse than the foreign exchange rates. That is because of the fact that the exchange offices or financial institutions charge a corresponding fee for their service.
The price of a foreign currency in the domestic currency in cash in the foreign country, on the other hand, is the exchange rate or the exchange rate . The term is particularly common when exchanging banknotes and coins from one currency to another. A fictional example: If you travel to Japan and exchange a 1 euro coin for Japanese currency there, you will receive cash of 125 yen (at a euro / yen exchange rate of 125). The distinction between foreign exchange and exchange rates is therefore almost entirely based on the approach. It can be stated, however, that foreign exchange rates are generally spoken of when currencies are exchanged electronically via foreign exchange trading. When exchanging cash, one usually speaks of exchange or currency exchange rates.
AT A GLANCE: WHAT ARE CURRENCIES
- Foreign exchange refers to a credit balance in a foreign currency (securities, money substitutes such as checks, money in foreign bank accounts)
- The topic becomes interesting when traveling to countries with their own local currency, but also when it comes to investments
- Exchange rates include the domestic currency price for one unit of foreign currency. They are influenced by several factors such as: B. influences the economic development of a country.
- Exchange rates or exchange rates are particularly relevant for exchanging cash for a foreign currency
- The trade also offers by different rate developments potential returns, but the risk of loss