A Guide to Foreign Currency

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.