Forex

Trading currencies tends to be a specialist area for the more sophisticated investor. It is the largest market in the world operating round the clock with trillions of pounds or dollars being traded daily.

With foreign exchange – Forex – you are basically choosing a currency pair such as £/€ or £/$ and trying to make money on the change in the price of one currency in relation to another. For example, if you pay £1,000 for euros when the euro is worth €1.20 to the pound you will get €1,200. If the euro then strengthens to €1.08 to the pound you could sell your holding and receive £1,111 making you a profit of £111.

Forex trading is done through a currency broker. It is usually highly automated and once you've set up an account you can trade with just a few clicks. There are several foreign exchange brokers in the UK.  Do choose one that has been established for a long time.  Large brokers have access to the best prices and should have a good service otherwise they wouldn't have survived so long or grown as big.

The exchange rate changes rapidly throughout the day and night so it's not for the fainthearted. Currency trading is highly risky and may not be suitable for everyone.  Basically, you should not invest money you can't afford to lose.

A huge number of factors influence the exchange rate such as inflation, employment and housing figures and even farm gate or factory prices. The exchange rate may change before the details are released based on what investors expect them to be and then change again – either up or down - the moment the actual figures are released.

Most specialist firms don't charge commission.  Instead they make their money on the difference (the spread) between the bid price and the ask price – the exchange rate when you buy and sell.  If the spreads are wide, you'll not make as much money when you trade as some of your profit is being lost. The narrowest spreads are usually available from brokers who quote to the most decimal places – the maximum is four decimal places. This is also known as fractional pip pricing.

Since it's impossible to keep an eye on this market 24-hours a day, you can place orders so that the system will automatically buy or sell your currency when it reaches your target. In this way you can limit your losses and lock in your profit .