What is Foreign Exchange?
Suppose we want to buy something online from overseas, such as a book that’s not published here. We pay by credit card, and though our payment is debited to our account in Australian dollars, the bookseller in the United States receives US dollars.
How does the transfer happen? Ultimately, it goes through a bank, which charges a fee for changing Australian dollars into US dollars. The fee is actually built into the exchange rates (see How Foreign Exchange Prices Work for more on this).
Banks also trade currencies between each other, so that if they have more customers wanting, say, British pounds than they have in their reserves, they go to another bank and buy from them to make up the difference (this typically happens in very large volumes). They generally keep cash reserves in a wide range of currencies on the understanding that a currency can only be exchanged for real value – that is, for goods or services – in the country in which it was issued. For example, Australian dollars are only acceptable as payment for overseas goods on the understanding that they can later be spent and you can get value for them in Australia.
Today, trading in foreign exchange is no longer reserved for the privileged, thanks to the development of the internet, online trading platforms and the availability of real-time foreign exchange prices from participating banks and spot forex or other providers.
Access to the necessary information and the means to trade directly into the same market as the big banks is available to nearly anyone with minimal risk capital, an internet connection, an account with a provider and access to a forex trading platform.
Thank you to Knowledge to Action for providing this information.
