The value of a currency is always expressed in terms of another currency.
These two values combined form a currency pair.
In this video, you'll learn what a currency pair is, how it's constructed, and discover
the most widely traded pairs.
You'll also find out why some investors are drawn to the forex market.
Let's start with what a currency represents.
A currency's value reflects such factors as the size of a country's economy, growth
rate, interest rate levels, and fiscal and monetary policies.
These factors vary significantly from country to country.
This is why currencies are paired.
A currency pair helps equalize factors between two countries by finding a rate of exchange
from one currency to another.
These exchange rates are very important because they facilitate trade and promote investment
between two countries.
As previously mentioned, a currency pair is simply two currencies paired together, but
is also what investors actually buy and sell when investing in the foreign exchange, or
forex, market.
Now that you understand what a currency pair represents and what it is, let's move on
to how one is constructed.
A currency pair is constructed using a base and quote currency.
Whenever you see a currency pair, the base currency is on the left and the quote currency
is on the right.
The value of a currency pair, or exchange rate, tells the value of the base currency
expressed in terms of the quote currency.
Think about it like this: The exchange rate explains how many units of the quote currency
it would take to equal one unit of the base currency.
The easiest way to understand this is to read the currency pair from left to right.
Let's look at an example.
Here's a currency pair involving the euro and U.S. dollar.
The euro is the base currency and the U.S. dollar is the quote currency.
Let's say that the pair is valued at $1.25.
The pair's value means one euro is equal to one U.S. dollar and 25 cents.
The pair itself is what investors buy or sell in the forex market.
Even though the pair involves two currencies, it acts as a single item like a stock, bond,
or commodity.
A currency pair is traded just like stocks, bonds, and commodities, with bid and ask prices.
When buying a currency pair, you pay the ask price.
When selling a currency pair, you receive the bid price.
. The bid/ask spread varies among the different
currency pairs.
Pairs with the largest bid/ask spreads usually have the least trading activity, while pairs
with the smallest trade the most.
These active pairs are often referred to as the majors.
The majors are the most widely traded pairs.
Some of the most commonly traded major currencies are Euro, U.S. Dollar, British Pound, Japanese
Yen, Canadian dollar, and Australian dollar.
You've probably noticed that among the majors, sometimes the U.S. dollar is the quote currency,
like with the euro and British pound, and other times it is the base currency, like
with the Swiss Franc and Japanese yen.
Whether the U.S. dollar is the base or quote currency, just remember that its value is
always expressed in terms of the quote currency.
Take the yen, for example, which lists the U.S. dollar as the base currency and the yen
as the quote currency.
Let's say that the value of the dollar and yen currency pair is 110 yen.
This means that one U.S. dollar is equal to 110 yen.
Even though it's expressed in terms of yen, the pair's actual value equals one unit
of the base currency, which is the U.S. dollar.
Of course, the value changes almost constantly because the forex market operates 24 hours
a day, starting Sunday at 4pm Central Time and closing Friday at 4pm Central Time.
This 24-hour nature is one of the forex market's appealing characteristics.
Let's conclude by discussing some of the other benefits and risks of the forex market.
Investors, worldwide, buy and sell currency pairs, changing values all day and night.
These value changes are how investors make a profit or loss in the forex market.
If an investor buys a pair, and it increases in value, the investor profits.
Conversely, if the pair drops, the investor will suffer a loss.
The forex market offers unique benefits, but it also has its risks.
These include the risks of using too much leverage or sudden changes in values of pairs
that can result from news events.
It's important to understand these risks before investing in the currency pairs that
you've learned about in this video or any other investment related to the forex market.