I am trying to understand the benefits of Forex trading vs buying/selling actual money.
Let’s assume that I have 1000 USD and I buy 100 EUR (actual money) at 1.23 exchange rate. Now I have 877 USD and 100 EUR. I estimate the EUR will go bullish and I will later exchange back to USD with profit. However EUR went down instead so if I try to sell them now I will lose money.
Given that I bought actual euros I can keep them in my account forever without affecting my dollars and exchange them only when the price is right.
If I compare that with opening an EUR/USD position on forex I get that I don’t own the euros so I can’t keep them forever ,without risking the rest of my account, or use them directly.
My current opinion is that Forex positions are more risky than exchanging actual money. But they can be potentially more profitable since I can trade currencies that I don’t “really” have at the moment. I am missing something important here?
There is no leverage when you buy actual currency. You could say leverage is 1:1.
Whereas trading forex pairs has leverage. Depending on which country you live and how you access the markets, this could be up to 500:1 (and transaction fees are lower).
The premium charged for physically exchanging US dollars for euros can be 2.5% each way.
That means, if the mid-point of the EUR/USD exchange rate is 1.2300[0], then it may cost you 1.2607[5] US dollars for each euro you buy, or $126.07[5] to buy 100 euros. If you wanted to sell your euros back when the mid-point rate is 1.2300[0], then you may get only 1.2000[0] US dollars for each euro you sell, or $120.00[0].
In the example above, the EUR/USD exchange rate would have to move almost 5% in your favor just for you to break even. Put another way, that physical exchange spread cost of over 6 US dollars is more than 40,000 times greater than the typical retail forex spread for EUR/USD.
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or determined prices.