You can go a long way toward understanding forex trading and currency quotes by learning a few foreign exchange rates key terms. Although the foreign exchange market is the largest and one of the most complex markets in the world, investors and businesspeople must be familiar with how it works to make smart, effective international trades.

Perhaps the most important thing to remember when dealing with currency is that there is more than one foreign exchange rate. Governments, banks and trading agencies report a variety of rates that depend on different variables, including the time of the trade and inflation. In general, these rates are governed by the following rules:

1. Currency exchange rates can be based on trades made in the present or in the future.

2. Only real effective foreign exchange currency rates accounts are adjusted to take inflation into account.

3. Some central banks fix their countries' exchange rates, while others allow them to move up and down according to market demand.

Action Steps
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Take advantage of both the spot and the forward foreign exchange rates

The spot exchange rate is the 'normal' exchange rate--it specifies the immediate or current value of a country's currency in terms of another. Interestingly, the forward exchange rate is a rate set during the current trading day, with payment agreed upon at a future date. Businesses and traders often use the forward exchange rate to protect themselves from a future drop in the value of their national currency by engaging in hedging and speculatory investing.

I recommend: InvestorWords.com maintains one of the Internet's largest glossaries of current foreign exchange rates definitions and other financial terms. You can also learn about forward and spot contracts from Wells Fargo, which offers a glossary of key international trading terms.

Beware the difference between nominal and real effective forex rates

Nominal exchange rates examine a country's balance of trade with other countries to determine the value it places on their currencies. However, these rates don't take inflation into account, so they can only approximate the price that consumers (including businesses) will pay for imported goods. The government attempts to fix this discrepancy by adjusting the rate for inflation, creating the real effective exchange rate, which reflects the actual price of goods at the consumer level.

I recommend: Although each country has its own methodology for calculating real effective exchange rates, you can learn how the U.S. determines them by visiting the website of the USDA Economic Research Service. This site also provides in-depth explanations of several exchange rate terms. The Consumer Price Index (CPI) and Producer Price Index (PPI) are also important factors in determining the real purchasing power of the dollar and two key terms you should be familiar with.

Know the significance of floating and fixed foreign exchange rates

Many countries with healthy financial systems allow their exchange rates to 'float' up and down as the demand for their currency increases or decreases in the forex market. Some countries, however, choose to 'peg' their exchange rates to some fixed value, tying their currency's value to that of another country (until 2005, China maintained such a policy.) While this may help developing countries achieve some financial success, it forces them to relinquish control of their domestic monetary policies, which can be dangerous in the long-run.

I recommend: Get in-depth explanations of fixed and floating exchange rates from NationMaster.com. The Cambridge Mercantile Group also briefly defines the two rates in language that's easy to understand, along with other foreign exchange rates key terms.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  You can find foreign exchange quotes using many of the Internet's common search engines, such as Yahoo! Finance and Google Finance.

If you're doing business with a foreign country or taking a business trip abroad, you'd better know how much your money – and their money – is worth. Keeping on top of currency values can lead to higher profits and reduced costs on business deals. And knowing where to get the best rates for currency conversion can save you a bundle.

Savvy business owners take advantage of a variety of foreign currency services that can:

1. Increase sales.
2. Improve your negotiating status.
3. Reduce costs.
4. Speed payments and collection of payments.
5. Lock in payments at the best rates.

Action Steps
The best contacts and resources to help you get it done

Use online currency converters

Online currency converters can be simple calculators or highly sophisticated tools that offer a number of features.

I recommend: The Universal Currency Converter at XE.com uses live, up-to-the-minute currency rates. The FXConverter provides exchange rates for 164 currencies and FXHistory allows you to obtain historical exchange rates. MioPlanet.com offers a currency converter you can download onto your desktop for easy access.

Pay attention to currency fluctuations

To stay on top of this game, sign up for an alert service. That way, you'll know when it's best to exchange funds.

I recommend: Rate Alert from American Express will monitor foreign currency fluctuations for you and send you an e-mail or a text message as often as you like.

Get the best exchange rates for business travel

When traveling abroad for business, it's usually best to exchange funds before you leave. Airports, hotels and other venues abroad charge high prices to convert currency.

I recommend: Several online exchange sites offer below retail rates, such as EZForEx.com, which can save you up to 20 percent compared to most foreign hotels, airports and currency kiosks.

Get the best exchange rates for frequent exchanges

If you frequently exchange currency, it's a good idea to sign up for a free account with an online foreign exchange site.

I recommend: XEtrade is an online discount foreign exchange service that can save you money when paying foreign invoices or purchasing foreign goods.

Lock in rates with foreign drafts

Foreign drafts are an excellent method for making payments when doing business abroad, allowing you to lock in exchange rates when they're most advantageous.

I recommend: Order foreign drafts for a reasonable fee from ForeignMoney.com. If you make regular payments, consider the QwikDraft service from Wells Fargo, which offers reduced fees for frequent users.

Use a full-service firm

If you're making regular payments to global suppliers and vendors, converting foreign checks into U.S. dollars or paying for foreign hotel rooms on your credit card, consider hiring a full-service firm to assist you with these tasks.

I recommend: Full-service firms, such as International Currency Express and FX International Payments from American Express, provide wire transfers for payments and foreign check collection services. View a demo of how to make an international payment at American Express.

Line up e-commerce solutions

If your Web site accepts orders from foreign countries, invest in software or online solutions that automatically localize prices on products and services.

I recommend: Oanda.com's FXP (Foreign Exchange Protocol) is used by many e-commerce sites that sell products globally and automatically converts prices in expense reports and purchase orders. GoCurrency offers a currency conversion Web tool so your site visitors can easily calculate prices into their home currency.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  If you're traveling, airports give the worst exchange rates – period. Instead try local banks, which use exchange rates that are close to actual currency traded values.
• •  Using your credit card to pay for products and services abroad can be one of the costliest conversion methods. Visa and MasterCard generally charge a 1 percent fee on foreign transactions, and your bank may charge another 1 to 3 percent on top of that fee.

Learning foreign exchange rates basics help you understand where your business stands in the international markets. The exchange rate itself is a ratio that shows how much one country's currency is worth in terms of another country's. Although it gives people a quick idea of a country's relative financial strength, the exchange rate is influenced by a complex set of factors that can be difficult to understand, especially when developing nations and countries whose financial systems differ from that of the U.S are involved.

To understand exchange rates, it's helpful to learn about the different factors that affect the a currency's value. Central banks like the U.S. Federal Reserve have the most control over the rate, but a number of other conditions play a role in its change as well, including inflation and foreign policy. Once you're familiar with the exchange rate basics, you can trade currency on the foreign exchange market and strengthen your business' international presence.

1. Inflation, fiscal policy and economic growth have important impacts on foreign exchange currency rates.

2. Many websites post live foreign exchange rates and offer powerful currency converters.

3. Currencies are traded on the foreign exchange, or FX, market.

Action Steps
The best contacts and resources to help you get it done

Learn about the factors that influence currency exchange rates

Before you venture into online forex trading or make business deals overseas, it's important to understand the basic factors that influence the foreign exchange rate. Once you know what drives forex rates to rise or fall, you'll be able to watch the market for trends and time your business transactions, so you don't get burned by bad rates.

I recommend: Check out the primer on foreign exchange rates from Investopedia. It outlines the basic forces that shape the exchange rate and provides insight into the dynamic relationship between central banks, inflation and the foreign exchange market. To assess the financial status of a particular country, get reports and publications from the International Monetary Fund.

Find the latest foreign exchange quotes online

A good, basic way to keep up with the exchange rate is by getting up-to-date quotes from currency sites online. Some of these simply display the most recent rate quotes, but others offer users the ability to trade currency, as well.

I recommend: Both Google Finance and Yahoo! Finance provide exchange rates and easy-to-use graphs for a number of important currencies, including the US Dollar, the Euro and the Yen. For a more comprehensive view of the international financial markets, visit XE.com, where you can find rate quotes for every currency currently in circulation.

Invest in foreign exchange markets with online forex trading

Exchange rates for many countries are determined by supply of and demand for their currencies on the foreign exchange market. Known as the Forex or FX market for short, this diverse market gives institutional investors, small businesses, multinational corporations and individual investors a forum for trading a wide variety of currencies and their derivative instruments. Whenever you do business overseas, your money goes through the FX market, so it's important to know the basics behind how it works.

I recommend: The Federal Reserve Bank of New York provides an extremely thorough and clear overview of the foreign exchange markets and their controlling influences. Once you know the basics of the foreign exchange, learn the ins and outs of trading currency by signing up for an account at Forex.com.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Sign up for an online forex trading practice account to hone your trading skills in a risk-free environment.