Forex trading has emerged as a very profitable and lucrative with inherent risk trade market. However in this market the trading is usually done in currencies. Several companies have registered huge profits through forex trading. In simple words forex trade is defined as the buying and selling of the currencies from all over the world by the brokers operating online.
The brokers provide leverage of as much as 100 to 200 times for the invested capital. Forex transactions are usually done in pairs with transactions open round the clock for all days of the week. The pairs can be of two currencies let’s say Euro-US Dollars etc.
The transactions in forex market usually involves the sell and purchase of the leading world currencies, however, most of the currencies of the world are available for sell and purchase in forex market. The investors usually prefer the most favored currencies such as US dollar (USD), Japanese Yen (JPY), Euro (EUR), Australian dollar (AUD), Swiss Franc (CHD), New Zealand dollar (NZD), British Pound (GBP). These currencies are sold or bought as per the current forex rates.
The forex rate can be defined as the rate of difference between the base currency and the counter currency. From the currency pair the currency which is sought to be bought is termed as the base currency while the currency with which the base currency is exchanged is termed as the counter currency. Thus if the rate of EUR/USD is 1.31 on 5th Feb, 2012, it implies that 1000 Euros can be purchased in exchange of 1031 USD. If the rate fluctuates to 1.58 at some later stage the investor can redeem 1058 units of the counter currency thus earning a profit of 26 USD. This transaction turns a huge amount if the money involved is higher.
However, at a given point in time the purchase rate or the bid rate is always higher than the selling rate or the ask rate, also known as spread. Thus if an investor does spot transaction of buying followed by immediate selling of particular pair of currency he/she will suffer losses. This inherent difference between the bid/ask rate is called base point or pip which is usually 0.0001 or less.