What’s The Difference Between Buying and Selling Currency on The Foreign Exchange Market?
Hi there! In this post I’d like to share with you the difference between buying and selling currency on the foreign exchange market. This might be of interest if you’re planning to change currencies, and aren’t sure how to go about it and what the procedures are.
To explain the difference between buying and selling currency, I’d like to share with you an example. Imagine for instance you’re in the United States, and planning to emigrate for a year to France. In this instance you’d probably start with US dollars, and need to change them into euros. Hence, when you make your foreign exchange transaction, it would like something like this: USD/EUR. This is a currency pair, and literally signals that you are changing US dollars into euros.
However, a different way to explain the currency pair USD/EUR is to say you’re selling US dollars to buy euros. This is because, to exchange your US dollars into euros, you are literally selling one currency at the present exchange rate to buy another. This means that, when you change currencies, you are always selling one currency to buy another. It’s simply how the process works. It’s actually impossible for you to sell one currency without buying another, or to buy a currency without selling one.
This then is what is meant by buying and selling currency on the foreign exchange market. The currency you sell is the one you start with: the one you want to exchange to receive another. The currency you buy meanwhile is the one you receive: the one that you get after the transaction is completed.
Of course, all this does not explain what the exchange rates have to do with buying and selling currency. This is another piece of the puzzle. In short, when you sell one currency to buy another, you don’t do it at a fixed rate (so for instance, 1.00 US dollar does not equal 1.00 euro) but according to the present exchange rate. This morning for example the USD/EUR exchange rate is 0.7760. This means that when you sell US dollars, you buy euros at a rate of 0.7760. If the US dollar were to strengthen up, you might get 0.7860 to the euro, meaning that for each 1.00 US dollar you sell you buy more euros. This is clearly a good thing!
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