Making a profit on currencies, or how to invest in currencies

Dec 9, 2020 Forex market

In this day and age, people are constantly looking for new forms of investment. They invest in, among others, real property, works of art, unique and rare car models, shares of listed companies, precious metals or currencies. The latter form of investing is gaining more and more supporters all over the world. However, in order to make wise investments, certain strict rules must be observed. They will help us avoid mistakes and increase our chances of multiplying our capital.

What is currency?

Currency is a monetary unit, in other words, the name of the money used within a particular country. Currency is both a measure of value and a means of payment. Of all the existing currencies, the most significant are the US dollar, the euro, the British pound, the Swiss franc and the Japanese yen.

How to invest in currencies – the rules of investing

Currencies should be looked at as if they were issued by a company. The better a country is managed, the higher the value of its currency. Currency rates, forecasts of exchange rate fluctuations and also the communications issued by national banks should be closely monitored. A lot of information can be obtained from the content of such messages, for example, information on how the country’s currency policy will be implemented in the future and how the exchange rates may change. It is also wise to diversify our currency investments.

We should not focus our attention and resources on one currency, as it is good practice to acquire different currencies. This way, if one of them collapses, an increase in the value of the other can save the investment. Patience and composure are also important when investing. This will allow us to see how exchange rates work and what they depend on.

What is an exchange rate?

What exactly is it? In simple terms, it is the value of a certain amount in one currency expressed in another. The exchange rate will indicate how many US dollars we will buy for one Swiss franc. The exchange rate expresses the relationship of exchanging one currency for another. Currently, the exchange rate is determined by the gold standard. In this monetary system, the standard economic unit of account is based on a fixed quantity of gold.

Where do the exchange rates come from?

A currency like the US dollar reflects the economic attractiveness of the United States and its economic potential. The exchange rate is influenced by macroeconomic factors, government decisions on public finances and the monetary policy of the national bank. The currency is also affected by the market and the players present on it, who decide on its value (as a result of the demand and supply for a given currency). Transactions take place all over the world from Monday to Friday.

The currency market is decentralised, so there is no single location where currency is traded. The exchange rates can be found on the websites of financial institutions and financial portals. They specify the purchase and sale amounts of the currency in question. However, it is up to the parties concerned to determine the final value of the exchange of the two currencies, as they can voluntarily negotiate the exchange rate between themselves.

How is the value of currencies determined?

The central bank of each country, which is able to influence the supply and demand of that country’s currency, is responsible for determining the currency value. In addition, the exchange rate is shaped by factors that are independent of each other, such as the level of prices, interest rates, and priorities in the implemented monetary policy of a country.

Central banks usually adopt one of two types of exchange rates:

  • floating exchange rate,
  • fixed exchange rate.

The exchange rate and the central bank’s policy of shaping it have a huge impact on the overall condition of the national economy. They can contribute to economic growth by directly affecting price levels, inflation and foreign transactions.

What to pay attention to when investing in currencies?

The opinions and recommendations of economic experts should be studied and analysed. It is also important to follow the websites of the central banks of individual countries and their communications on inflation and interest rates. Ultimately, the best solution is to examine historical exchange rates and to draw attention to the recurring regularities in the increase or decrease of the currency’s value.

Investing in currencies must be supported by experience and suitable knowledge. It’s a complex process that cannot always be predicted. A single decision taken by a given government may result in an avalanche of events that can cause currency market reshuffles.

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