An Introduction to Physical Currency Exchange and Forex
Physical Currency Exchange vs. Currency Trading
There are different ways one can make money trading currency. The value of different currencies never remains static against the US Dollar. Physical currency exchange refers to exchanging your local currency, such as the Dollar, to the currency of another country and physically owning the foreign currency. Foreign currency exchange, or forex, on the other hand, involves trading the value of one currency for another and profiting on the fluxuations in price for the varying currencies, without owning the currency physically.
1. Physical Currency Exchange: You Own the Money
You can buy physical foreign currency when the currency of another country is going to appreciate in value against the dollar, you are relocating abroad, or simply going on vacation. You can purchase foreign currency from major banks as well as from currency dealers.
Most banks do not have foreign currency on hand. For instance, at Bank of America, you can buy the foreign currency online and have it sent directly to your house or to a bank center near you.
Currency dealers are companies that specialize specifically in providing foreign currency, and the physical locations have the currency on hand. When purchasing more than $500 worth of foreign currency, it is advised to purchase the currency online. They range from well-known companies such as AAA, to other sites you can find online.
2. Physically Owning Foreign Currency as an Investment
Investing your money abroad can be a sound way to make money. You can purchase foreign CDs, bonds, or put your money into foreign bank accounts in order to gain favorable interest. These options are often less risky than forex.
3. Forex Requires a Broker
Foreign currency exchange is done through a broker, or currency dealer. You cannot trade forex without the help of a broker. Going through a broker is different from buying currency through domestic banks or currency dealers, or when investing in foreign assets abroad.
4. Forex has no Physical Location
Forex refers to the simultaneous buying of one and selling of other currencies, referred to as a currency pair. Rather than physically owning the money, you exchange the values of the currencies online through a forex broker, which is done electronically. You open an account with the broker and use leverage to trade on margin. Forex is not performed at any physical location nor is there a centralized location, such as a stock exchange.
5. Forex is Riskier
Because you are trading currency on margin with forex, there are certain risks you take. Because you trade more money in currency than you really have, you can lose your investment quickly if you are not careful. On the other hand, those sorts of risks are not as acute when you buy physical currency, because the other currency with never lose all of its value.
How to Choose a Physical Exchange Provider
There are different things to consider when choosing a physical exchange provider.
1. How much are you willing to exchange and over how much time?
Exchange Tips For example, are you looking to make weekly transactions or just one lump sum? Travelers are often hesitant in taking large sums of cash when traveling, but do not want to deal with exchanging money when they get to their location or deal with changing exchange rates. Exchanging your money domestically if often more expensive than when you are in the foreign country, where you can get cash from ATMs and your hotel.
2. Commissions
Be wary of “No Commissions”. If you decide to exchange some currency before you travel, and decide not to deal with banks, make sure to research exchange commissions. Rates very, and range from minimum charges, flat fees, to handling fees. Even though some companies claim they are “commission free” they make up for it by giving you a worse exchange rate.
3. Mark-ups in the Exchange Rate
Banks offer Better Rates Different physical currency exchangers, banks or other companies, offer different exchange rates. Banks usually offer not only similar exchange rates but also those that are better than exchange companies offer. Also, you can experience mark ups in the exchange rate when you use your credit card abroad, some banks charging 1-3% fees. Make sure to see what charges your bank or credit card company apply.
4. When to Exchange
When to Exchange The best way to know when to exchange is to do the research and planning well before you take your trip so you can follow the exchange rates and pick the best time to convert your money. In addition, in many countries they accept Dollars as readily as their own local currencies, especially in the Caribbean, and peg their own currencies to the dollar. It might be better to pay in dollars than spending money on exchange fees.
How to Choose a Forex Broker that is Right for You
It might seem more than a little overwhelming when trying to select the right broker when venturing into the foreign exchange currency market. Because you are likely, and it is desirable, to create a long-term trading relationship with your broker, here are some helpful tips and things to keep in mind when you begin your search:
1. Reputation
- Online Broker Reviews and Ratings
- Forex Reviews
A good place to start your search is stopping at online forex forums to see what other traders are saying about various brokers. A simple search engine query will give you many forums to choose. Reputation and trader satisfaction are likely good indicators of a sound broker. In addition, it doesn’t hurt to join email groups, mailing lists, and making contacts with others in the forum community. This way you can get referrals to a broker that’s right for you.
2. Experience
In addition to good word of mouth publicity, experience is a key. In addition to references and buzz from forums, experience, track record of success, speed of trading, and the amounts of advice given are important considerations.
3. Demo Account
You will likely want to start out with a practice, or demo, account, so make sure the potential broker offers an easy to use demo program that mimics their live software. A demo account allows you to make virtual trades with imaginary money to help you learn the ropes of trading before you ever risk money of your own.
4. Accessibility of Broker
Customer Service Make sure your broker is accessible to you via email and by phone. With the new internet age, proximity of location is less important than in the past, but make sure your potential broker can be easily reached for customer support. Are there other brokers around if yours is temporarily unavailable? Is the customer service friendly and approachable?
5. Leverage Desired
Consider what sort of leverage you desire when considering brokers. Leverage refers to ways investors utilize debt to increase profits on their investments, and in forex, it specifically refers to the ways brokers loan you money to invest on margin, to use the fluctuations in currency exchange rates between two different countries to enhance profits.
6. Trading on Margin
Margin Explained Specifically, trading on margin implies that you do not have to put up the full amount of money when investing. Margin refers to your deposit, and leverage the ratio of your investment. Once you open a margin account, standard brokers will offer you 50:1, 100:1, or 200:1, all depending on the risk you are willing to take and the size of the broker.
This means when if you want to trade $100,000 of currency on 100:1, or 1%, margin, you the investor need to deposit $1000 into the account. Because currency rates fluctuate only about 1% or so during intraday trading, it is not as risky of an investment as you think, but one should still take care. Leverage amplifies your losses as it does your earnings. A good broker will help you to limit losses.
Check to see whether the margin requirement changes for different currency pairs or on different days of the week.
7. Starting Capital
As stated above, connected with leverage is starting capital, or your margin. For a novice trader, many brokers offer “mini” forex accounts that require an initial $1000 deposit or under, or a standard account for about $2000. Many new traders, however, fail because they are undercapitalized. For a standard account, one should have $100,000 in starting capital, $10,000 for a mini account, and $1000 for a micro account. Compare what sort of accounts different brokers offer.
8. Transaction Costs and Trades per Day
How many trades can you make in one day? This depends a lot on how much money you have in your margin account and the amount of leverage you are using. Leverage is connected to your transaction costs, the price you pay to make trades. Be careful when considering high leverage trades, because even though you only need a fraction of the money down, the transaction price as a percentage of your account increases. Make sure to consider carefully the fees of different brokers.
9. Trading Hours
Forex trading hours are unique in trading markets in that they run from 5 pm EST on Sunday through 4 pm EST on Friday. The best times to trade are when the markets in London and the United States overlap, a five our window between 11:00 and 16:00 GMT, which is between 7 am and noon EST, when most trades are made. Is your broker readily available during this important trading window?
10. Regulations and Registration
It is important to keep in mind that while the forex market is unregulated, brokers themselves are. If you live in the US, make sure the broker is registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CTC) and a member of the National Futures Association. The National Futures Association’s website can verify a broker’s status with the association. In addition, it is very important you make sure clients are insured against fraud and broker bankruptcy, just in case.