In the financial market, the stocks that investors are most likely to come into contact with are mostly one-way transactions. The model of one-way transactions is "buy first and sell later", which means that there is a profit opportunity only when the price rises.
One of the characteristics of the foreign exchange market is that it can be traded in both directions. When investors expect the exchange rate to rise, they can "buy first and sell later", which is also called long (long position). If they expect the exchange rate to fall, they can "sell first and buy later", which is also called short (short position). In other words, whether the exchange rate of a currency pair rises or falls, there are profit opportunities.
Since the foreign exchange market trades currency pairs, so-called short selling does not mean being bearish on a single currency. The concept is slightly different from other markets.
Because a currency pair involves a combination of two assets, the rise and fall in price is not actually the appreciation or depreciation of a single currency, but the change in the relative value between the two currencies.
When an investor trades a currency pair, such as EUR/USD, by going long on EUR, he is actually shorting another currency, USD. Conversely, if he goes short on EUR, he is actually going long on USD.
For example, an American holding US dollars exchanges them for euros at a bank. In essence, he is selling (shorting) the US dollars in his hand and buying (going long) euros.
The question is, if he is Australian and does not have US dollars, how can he sell US dollars and buy euros?
This is the arrangement of margin trading in the foreign exchange market. The basic operating concept is that margin trading allows investors to deposit a certain percentage of margin through a broker, and then "borrow" the currency they want to sell from the broker, and then buy another currency. Therefore, investors do not need to hold any currency in advance, but can still do "two-way trading" in the foreign exchange market because the broker is willing to provide investors with this "borrowing" service.
For example, if you are long EUR/USD, the investor borrows US dollars from the broker to sell and buys Euros to hold. When the Euro rises, the position will be closed by selling the Euro and buying back the US dollars to repay the original loan from the broker. The profit from the price difference at this time belongs to the investor. Of course, if the Euro falls, the investor's loss will be settled in the margin account.
But the more practical operation is that most margin transactions do not involve physical delivery, so there is no need to actually hold any currency. Participants hold "foreign exchange contracts", and under this form, buyers and sellers only need to settle the contract in the end, that is, the price difference between entering the market and exiting the market.
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.