If you are living in the United States, it is possible for you to invest in forex directly. You can open up a forex trading account with someone like – Forex.com and start trading in currency for as little as $250.
It is reasonably easy to get an account started and then start trading; it is a lot easier to lose a whole lot of money in forex trading too!
This is because of leverage.
How does leverage work?
Even the most basic accounts come with a leverage of 100:1 and this means that you can win or lose a lot of money in a very short time.
Leverage allows you to buy more than you have paid for. A leverage of 100:1 means that you can buy $100 worth of forex with only $1 in your account.
If you had $1000 in your account and had a leverage of 100:1 – you will be able to buy dollars worth a 100,000.
When you trade currency; you need to buy one currency and sell another. So in if you wanted to buy US Dollars, you will need to sell a currency like the Euro or the Australian Dollar. Currencies always trade in pairs.
The going rate of the USD to the AUD is
1 USD = 1.5 AUD
So with a thousand dollars you can buy a 100,000 US dollars and sell the same amount in Australian Dollars.
If the Dollar were to go up to 1 USD = 1.6 AUD, then your 100,000 dollars will each rise ten cents in value and you will earn yourself a 10,000 dollar profit on your initial 1000 dollars.
However the setback can be equally worse and in the real world, the setbacks are often much worse than the profits that you take home. If you are just beginning to deal in forex and currency trades – then it is best to start really small and get yourself accustomed to the market moves and terminology.
A high leverage is just one of the many factors that you need to consider while trading forex.