Below are four misconceptions about money exchange you should know about.
1. Thinking You Can Predict When a Currency’s Value Will Be Lower
The truth is it’s hard to predict when a currency will drop in value. You can predict with some accuracy other matters such as the increase in gas prices during holidays, but the same does not apply with currency prediction. This is because currency exchange rates are based on a spot rate, which refers to a theoretical base rate. The actual exchange rate, however, includes the profit margins applied by various financial institutions.
This rate is fleeting and can fluctuate countless times in a day. It is therefore almost impossible to predict with certainty how currencies will react in any given day. The actual currency value depends on a number of factors such as trading, global economic trends, etc. A huge economic event may not be sufficient to trigger changes in a currency’s value.
However, a minor event can sometimes trigger massive changes in the value of a currency. It is therefore difficult to predict with accuracy the value of a currency at any given time unless you are extremely lucky at coincidental predictions.
2. You Lose Money When Exchanging Currency
This is another misguided misconception. While it may look like you are losing money when exchanging currency, remember you are actually ‘paying’ for the service of exchanging your currency, not ‘buying’ cash. It’s understandable to feel like you are losing money since you are dealing with cash, and the original value of cash is what sticks to your mind.
That cash cannot remain as it was after you pay for the service, and this is what people mean when they say you lose money when exchanging currency. For instance, items at a store are not sold at the same price they were bought. The seller has to recover their money and make a decent profit. This requires them to apply a margin to remain in business.
Currency exchangers operate under the same principle. They buy the currency at the spot (rock bottom) rate, and then add their margin before selling it to you. These margins vary depending on a number of factors such as location, convenience, competition, among others.
3. You Will Get a Better Rate If You Use a Credit Card
When buying cash (which is what currency exchange is all about), the transaction is considered a cash withdrawal, more or less a cash advance. If you use your credit card to ‘buy cash’, interest is charged on your card from that moment until you pay it in full. This type of transaction does not earn you loyalty points. The more transactions you make with your credit card, the higher the conversion fees you will pay.
4. Advertised Online Rates Are the Same Ones Offered at Financial Institutions
The rates you get by using online currency converters can be deceiving. By the time you get to a forex bureau or financial institution, you quickly realize the rate you saw online is different from the one you are being offered. The truth is currency exchange rates fluctuate by the minute. The value you get when using an online currency converter is only applicable for that moment. It will most likely be different by the time you get to a currency exchange shop.
In any case, most financial institutions only adjust the rates once a day; but those you get when using online forex converters are actual live rates. However, remember every currency exchange institution applies its own margins on spot rates, which means the rate you find on the internet may not apply at every financial institution.
Currency exchange rates depend on a number of variables such as the location of a forex bureau, among other factors.