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Trading on forex is a concept that involves timely sale and purchase of foreign exchange so as to make a profit on the differences in prices of foreign exchange which takes place from time to time.
Foreign exchange refers to the exchange of the currency of one country with respect to the currency of another country. There is a forex or foreign exchange rate which varies from day to day, even hour to hour at time. This rate depends on a variety of factors - whether countries are selling that currency or buying it. If countries are buying that currency, its rate increases Vis a Vis your currency. If countries are selling that currency, its rate falls with respect to your currency, and so on.

Forex traders make a profit by taking advantage of marginal increases or decreases in foreign exchange values. Let’s take the example of the Rupee vs. the Dollar (US). Let’s say the rupee is trading at Rs.45 to the dollar. At this rate, the trader will buy lets say $10,000 at Rs.45 per dollar, which amounts to approximately Rs. 450,000. He waits for a couple of days when the Rupee weakens to Rs 47 per dollar; he will sell the $10,000 for Rs. 470,000 pocketing a cool Rs. 20,000. If he manages to get most of his transactions right, a forex trader can make any amount during the day.

However, this is based all on guess work. One cannot predict for sure if the price of the rupee vs. the dollar will weaken or strengthen the next day. You could think the price is right, but it could fall the next day and you’d be at a loss. In fact, it could keep on falling for the next few months, never to approach the price you bought at for a while. In such a case you will either need to sell at a lower price and take a loss, or keep it till the price rises. Sometimes you need to make a call on whether you want to free up the cash you have invested to be able to make up the loss elsewhere, or you want to keep it invested because you know it will increase.

Based on a similar concept are stocks. Stocks are basically parts of a company’s capital divided into small shares. These shares can be bought and sold on a stock exchange like the Dow Jones or NASDAQ…or in India, on the Sensex and NSE. Stock brokers operate on the same principle as forex traders. When a particular stock is in demand, its price goes up, and when it’s not in demand, its price falls. If one follows the market closely, one can predict to some extent what direction the price of a share will take in the coming days. You have to know the in and out of the stock exchange. You have to follow news about the company’s growth and future very closely. Usually, small investors make money by investing in stocks and leaving the stock unsold for a long time, hoping the value will go up immensely over the coming years. However, this doesn’t work always. Some companies simply do not do well in the long term, and hence your investment may come to nothing much even over 10 years or more.

I will discuss both long term investing and short term investing. First let me take the benefits of long term investing, the demerits of which I explained to you above.

• Say you decide to invest Rs. 100,000 when you are 20 years old in a Reliance Industries share which costs Rs. 100 each. You buy 1000 shares. You now just put these shares away for the next 40 years. Say Reliance continues to grow and its share price reaches Rs 1,500 like it is now. You decide to sell these shares when you retire, say at age 60. Can you imagine the amount your investment has appreciated? Let’s see. 1000 shares x Rs 1,500 = Rs 15,00,000. That’s on an initial investment of just Rs 100,000. Say you had invested a few lakh more, you’d have made that much more. In another scenario, it is possible that the company might even have closed down by the time you retire, thus giving you nothing on your investment. Blue chip companies are always a safe bet in such cases, though are are expensive.
• Now let’s say you want to do short term investing. Say you read in a couple of Magazines that Infosys was going to buy a couple of companies abroad, and that its profit is going to be very high this year. This is a gold mine for a short term investor. Short term investing usually requires a lot of money as margins are small, so if you want to make a quick buck, you need to invest big. Say you buy 10,000 shares of Infosys today @ Rs 100 per share. Tomorrow when the company releases its results, and the news of its acquisition, its price goes up to Rs 110. A marginal increase only but if you bought 10,000 shares, it translates into a profit of Rs 10 for every share, which comes to a whopping Rs 100,000 in a day. Of course, your “grapevine” and rumours and speculation could be wrong too, and the price could fall drastically. In such a case, you would have to walk away with a loss, or choose to remain invested.

These techniques basically tell you how to go about forex trading and stocks. These are both very lucrative fields, but you need to tread with care. Many young investors have lost their entire savings on a couple of days of trading, never able to get the money back. One must only invest here if one is confident one will make a gain, and only if you’re not investing all your capital into the markets. You must have backup in place before you go around investing in such a volatile option.

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*Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.