What are you really selling or buying in the currency market?
You are buying and selling money, or more specifically, a nation’s currency. Generally, in the forex market, it helps to think of money as a commodity. When you buy a currency you hope that its value will strengthen compared to the currency that you are selling. If you are selling, you are betting that the currency you are selling will weaken compared to the currency you look to buy. Like any other commodity, currencies are displayed in quotes based on the current rate in the market, known as the spot rate, and traded in currency pairs; like the U.S. dollar against the Canadian dollar (USD/CAD) or the US dollar and Japanese yen (USD/JPY).
Also, although you are buying another country’s currency, you are not buying anything ‘physical’, and thus no physical exchange of money ever takes place. This can be confusing, but think of it like buying shares of a publicly traded company where everything is done electronically inside your trading account. But unlike the stock market, the forex market doesn’t have a central exchange like the New York Stock Exchange for instance. Instead the forex market is an interbank market, which means it’s all connected together in a network of banks and institutions.
You can also think of buying currencies as buying shares in a country, you are betting on the performance of a particular country’s economy. You’ll learn more about reading a currency quote and the economics that move.
