Investing Basics

Investing Basics

International currency exchange rates define how much one unit of currency can be exchanged for another. Floating rates show continuous variation defined by a multitude of variables, pegged (or fixed) currencies float in tandem with a currency they are joined to.

Importance

The importance of investors knowing the value of their home currency in relation to foreign currencies enables them to analyze investment prices in relation to the currency they use regularly, this ensures an informed decision is made upon investing in a foreign company. An example of this can be seen when a U.S. investor decides to go for a European investment. A decline in the value of the U.S. dollar could influence the value of the foreign investment; alternatively this could negatively influence the investment if the value of the U.S. dollar were to increase. There are a number of factors that will impact upon the value of a countries currency. Interest rate decisions, unemployment rates, inflation reports, gross domestic product numbers and manufacturing information are the holy grail resources for investors looking to analyze the value of a currency and should be considered a must read before making such a commitment.

Unemployment Rates

The Bureau of Labor Statistics is a brilliant source of information for unemployment rates in the United States. This information is valuable for potential investors due to the influence this rate has upon the value of currencies, an increased percentage of unemployed individuals will usually decrease the value of the currency of that country or indeed the country in tandem with it.

Inflation

Inflation is the level of the price of goods and services is rising and, as a result of this, how the purchasing power of currency is declining. Central banks attempt to establish an equilibrium, limiting inflation while simultaneously avoiding deflation to ensure the smooth running of the economy. Among the reasons of the importance of investors knowing the rate of inflation is the inflation trade which profits from an increase in price levels. The commodities involved include gold and oil as the primary focus of ‘inflation trade’. This term refers to a speculative practice that attempts to profit from an increase in inflation.

GDP

Gross domestic Product is the monetary value of the produced products within a countries border within a specific time period. The formula:

GDP= C + G + I + NX

Can be utilized to ascertain the value of a countries products. C equates to all private consumption in a nation’s economy. G is the sum of government spending, I is the total of the entirety of a countries investments which includes businesses capital expenditures and NX which is the total value of a nation’s exports which is found by deducting the total value of imports from exports (NX = Exports – Imports).

Resources

The web is full of invaluable resources for investors, a simulation stock market can be found on the world renowned Investopedia whereas more refined, localized websites such as the vancouver bullion & Currency Exchange (VBCE) website will provide you with geographically appropriate information for Canadians seeking to get into investing.

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