What is foreign exchange?
Foreign exchange – also called FX or forex – refers to exchanging one currency for another. Technically, when you do this, you’re ‘buying’ one currency and ‘selling’ another. So, if you’ve ever gone on holiday and converted your pounds to euros for example, you’ve traded forex.
When you convert currencies, your money doesn’t just evaporate – it has to stay in circulation. The price you get when you ‘sell’ your currency to ‘buy’ another is known as the foreign exchange rate.
Because you’re always selling one currency to buy another, forex is always traded in pairs. And, each currency has its own unique ticker symbol – think of it as a technical name – that makes it easily distinguishable from other currencies on the market.
For example, the British pound has the ticker GBP, the US dollar is USD, the euro is EUR and so on. These three currencies alone make up a majority of the daily forex transactions around the world – with $6.6 trillion worth of forex transactions taking place daily.*
When these currencies are exchanged for one another, they form a pair. So if you’ve booked a trip to New York from London and need US dollars, you’d buy USD with GBP. And, if you want to buy US stocks from the UK, you’ll need to do the same.
What is foreign exchange risk?
Foreign exchange risk is the risk associated with exchanging one currency for another. It’s an inherent part of foreign exchange because, due to the size of the forex market, the number of daily transactions, and the various factors that can affect the value of one currency over another, forex prices are volatile and can change rapidly.
The risk arises when currency valuations change in between an order being submitted and executed – which could result in you getting less of the currency you’re buying than you were expecting.
Foreign exchange risk and stocks: what you need to know
To buy US stocks like Alphabet (Google), Apple or Tesla from the UK, you’ll need to exchange your pounds for US dollars – which could carry a degree of foreign exchange risk. That’s because between the time that your order is placed and executed, the USD/GBP exchange rate could fluctuate.
What does this mean for you when buying US stocks from the UK? It simply means that you might receive fewer shares than you initially thought you were getting. But, foreign exchange risk can also play to your favour – and you might get more shares than you had originally bought.
What’s important to remember, is that Moneybox is not responsible for any negative or positive fluctuations in the exchange rate between currencies. Exchange rates are determined by a whole range of economic factors, and forex itself is one of the most volatile markets in the world.
Buying US stocks with Moneybox
Our range of US stocks includes some of the biggest and best-known companies in the world. Names like Apple, Microsoft and Tesla are stock market favourites, but we also offer household names like Coca-Cola, Disney, Mastercard and more.
And don’t worry if you can’t afford a full share – fractional shares make even the most expensive stocks in the world accessible. You’ll be investing in stocks regularly over time, so you’ll buy when prices are high, low and everything in between.
To invest in our US stocks, open a Moneybox Stocks & Shares ISA today. Or, if you have an ISA already, head to your Stocks & Shares ISA, scroll down and tap Add more funds or stocks, then select Stocks.
Just remember, investing in stocks – as with all investments – carries a certain amount of risk, and you might get back less than you invest. That’s why it’s important to invest for more than five years, to give your money time to recover from any dips along the way.
*Bank of International Settlements, triennial survey April 2019.