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Trading in foreign exchange or currency is called as Forex trading. In India it is absolutely legal to trade in foreign exchange as long as one is dealing with four currencies approved by RBI viz., US Dollar, GB Pound, EURo and Japense YEN. However, you need to trade with brokers having memberships in these exchanges. These brokers are called as Forex brokers. These days even individuals can start trading in foreign exchange or currencies.
Forex trading is similar to equity trading. As the price of shares move up or down, you book profit or loose money, in the similar fashion you gain or loose money in the forex trading market.
The benefits of trading in foreign currencies are,
Anytime trading: Since this is a worldwide market, the trading can be done anytime, as long as any market is open anywhere in the world
Hedging: If you can foresee that the price of the foreign currency is going to increase in near future and you have to make a payment at a later date, you may hedge the foreign currency by purchasing now and paying later.
Leverage; The forex trading works at very large leverage of the order of 1:50, 1:100 or even 1:200. This means you only need Rs. 1 money to trade in 100 foreign currency worth Rs. 100 when the leverage is 1:100.