Naturally, you want to get to the bottom of it. So let your tall, dark, handsome and adjective filled author give you the tease.
The stock market is massive.
The Real Estate market is bertha-esque
The bond market is even bigger.
But the behemoth mother trucker of all markets?
There is this one, absolute BIGGEST, trading market in the world. The foreign currency market is to the stock market what Costco is to a corner store that sells five-cent sour candies.The FOREX market stands for FOReign EXchange. To the layman and your mother-in-law, it’s simply the currency trading market.
And it makes large banks and countries very wealthy and other players very poor and desolate.
So what the heck is it and how does it affect my life?
Much more so than you even know.
But, in the interest of those with an actual passport that travel and use foreign currencies (why don’t you if not?), we’ll start with how exchanging currency works and how money is made and lost – mostly by the consumer.
Then I’ll show you where to save up to $50 on every currency exchange you make. Multiply that out in a lifetime and it can add to tens of thousands of dollars of savings.
So go away if you don’t like saving money.
The currency exchange market goes on for 1440 minutes a day (24 hours for the rest of us) and 7 calendar days a week. And unlike the tens of thousands of stocks and bonds there are out there to choose from, the currency market generally trades major currency pairs.
A currency pair is pretty simple.
Say you live in the good ol’ US of A. You work a job or run a business and you get paid in US Dollars. Now one day you wake up and decide that you want to go to Canada and buy some hockey sticks. Because, they're useful to beat people over the head with and chase raccoons off your property.
In order to make purchases in Canada, you have to have Canadian Dollars. So you go to your local bank or currency exchange and trade your US Dollars for Canadian Dollars.
The currency pair in this instance is the US Dollar vs the Canadian Dollar. Called the USDCAD pair by the experts in the field.
But this trade isn’t straight up. The bank (or currency exchange) making the trade for you can’t send their kids to private school and support their gluten-free, organic, whole food diets by doing this for free now can they?
So they charge a fee to make the exchange. (More on this shortly.)
This is where you have to pay a bit more attention.
Now, in this transaction there is a buyer and a seller. Since you are going to them for the purchase of Canadian money, you are the buyer of the Canadian Dollars, and they are the seller.
The second part of this foreign exchange trade is the exchange rate between that specific pair of currencies.
Still with me? Good...
The exchange rate is posted online or on the window of most banks and currency exchanges and just like the price of Samsung TV’s and Chevrolet Camaros, the price of currency varies from outlet to outlet.
So the Royal Bank may sell you 1.0523 CAD (Canadian Dollars) for each 1.00 USD you give them. …Yes, they go to the third and sometimes even fourth decimal point for these foreign exchange transactions.
Because these transactions can get into the millions and billions, every decimal can mean a difference of millions. Maybe not to you and I, but definitely to the bottom line of the banks (are you a shareholder of banks yet???)
Big players are well aware of that.
Now these rates are from last summer, but here's an example.
For every $100 US Dollars you sell in our scenario, you get $105.23 Canadian Dollars.
But, you’re smarter than the average shmuck so you shop around, especially if you’re exchanging thousands of dollars or tens of thousands.
Note, that there are strict currency exchange limits, generally $10k for an individual in most westernized countries. Otherwise you’re up to something in the eyes of the government.
You then walk down the street to a boutique currency exchange shop to see how others compete with that rate.
The Vancouver Bullion and Currency Exchange offers to sell you $1.1101 CAD for each 1.00 USD. Now you’re getting $110.11 for each $100 USD.
This is almost five bucks extra per hundred dollars. They are giving you a much better rate.
That means that if you’re exchanging a thousand bucks. - You’re getting $1101.10 CAD for each $1000 USD.
All the Royal Bank would’ve given you was a measly $1052.30.
By taking an extra step and looking at competitive prices for currencies, you’ve got just shy of a $50 bill in your pocket for every $1k exchanged.
This is enough for a Grade A Alberta Beef filet mignon dinner after a day of buying hockey sticks in the great white north. Or whatever a cool vegan alternative would be for those among us.
It doesn’t take a genius to figure out that when you’re changing currencies in 10 or 100 times that amount (such as for a business, or even a country), every thousandth decimal place counts. So shopping around is prudent.
In the next post, i'll explain exactly how these guys make money changing currencies.
It's more exciting than tequila body shots.
Just ask this guy.