What does it mean to buy a currency?

When an investor enters into a transaction to purchase a currency they are, by implication, also entering into a transaction to sell a different currency, as currencies always trade in pairs. Said another way, if an investor were to purchase Australian dollars (AUD) using U.S. dollars (USD), that investor would be selling USD to purchase AUD.

A common method of purchasing currencies is through the spot market. In the spot market, a buyer and seller agree to transact at a specified price, usually with trade settlement (delivery of the purchased currency) within one or two days. The trade is typically facilitated through a market maker or broker, in much the same way one buys or sells stocks. Another method of purchasing currencies is through the use of forward contracts – a topic I will discuss in an upcoming Currencies Unplugged.