by Colin Morley

Created on: August 30, 2008   Last Updated: September 16, 2008

Trading in foreign currency is not as complex a business as you may imagine. In simple terms it is no different from trading in baked beans or cornflakes. When you buy one or two packets of cornflakes or tins of baked beans from your local store, you are buying the amount that you need at a price which gives the store owner a profit - his reward for buying several boxes of cornflakes and baked beans in order to provide you with what you need for your family.

Think of a foreign currency as a tin of baked beans. Supposing you are planning on visiting France, Germany or Holland where the currency is the Euro. You will need to buy (for example) five hundred Euros, and in order to do this you will visit a currency exchange outlet in order to buy your Euros at the price quoted for that day. The price you pay will be less than the currency trader paid because you are buying a few hundred Euros for your holiday, whereas he is buying several thousands of Euros in order to stock his shop with Euros to sell you. Not really so different from baked beans.

Ah - I hear you say - but the price of baked beans doesn't change every day! Well that is true. Trading in currencies depends on various economic and political circumstances and what is going on between the big players - the banks and financial institutions of the world. Bad news on the stock market(s) or an unstable political situation can cause a currency to fall in value as compared with other currencies. That is because the banks invest money on a daily basis in foreign currency conversion based on their take on what is likely to make them the most profit. A bit like playing red or black on a roulette wheel, but with perhaps just a little more finesse and expertise and a little less chance!

Foreign currency exchange rates will dictate how many holiday Euros you will get for your dollar, pound, yen etc. and foreign currency exchange rates will also dictate how much your foreign currency trader pays. Look up the exchange rates for any foreign currency and you will notice that there are several rates quoted. The rate you will get is the tourist rate. The rate your currency trader gets will be much better, because of the quantity he is buying and the comparative risk he is taking.

Will all foreign currency traders offer you the same foreign currency exchange rates? Well no. As with baked beans, shop around before you commit yourself to buying from a particular currency trader. Some may charge you a percentage commission on

• 1
• 2
• Next Page >>