Investing in Forex for Your Personal Finance – an Overview
Why would I want to trade Forex?
Good question! The latest Bank for International Settlements Triennial Survey shows that global foreign exchange trading increased to more than $6 trillion per day, making the market larger in volume than the stock and bond markets combined. That is also over 200 times bigger than the new york stock exchange. The currency market is the most actively traded market in the world. Its transaction costs are lower, letting investors enter and exit forex trades easily. The forex market is also a fairly recent one compared to stock markets, which can trace their roots back centuries. The forex market also offers traders far more flexibility than the stock market.
Is Foreign Exchange a Good Investment?
Investing in Foreign currency is a smart way of diversifying your portfolio. Many investors turn to the forex market in search of fast profits and the exciting opportunity to speculate on exchange rates. Financial institutions like commercial banks, central banks, money managers, and hedge funds are major players in the foreign exchange market.
What is Forex Trading?
- Forex or foreign exchange is trading in currencies from different countries against each other; for example, the U S dollar against the Euro. It is also called F.X. trading or currency exchange or Spot F.X.
- F.X. traders take advantage of an increase or decrease in value by exchanging their own country’s base currency with the foreign currency (Quote currency). Forex is different from trading stocks because currencies are traded against each other. So, the exchange always shows the value of one currency relative to the other. The U.S. Dollar is the single most popular currency in the world and is the dominant reserve currency in use around the globe. The EUR/usd is one of the most liquid currency pairs in the world. The second most traded pair is the USD/ Japanese yen. It is the benchmark for Asian economic health and even the global economy. The U.S is one of Japan’s biggest trading partners meaning the Yen is highly sensitive to U.S. demand for Japanese electronics and cars.
How to Invest in Forex Currency?
- First, research forex related articles, different currencies, and strategies like carry trade, for instance, before deciding the currency you are going to purchase.
- The second step would be to open a brokerage account to hold your preferred foreign currency.
- Next, you’d have to fund your brokerage account by adding the required amount to purchase the forex currency using credit cards, wire transfer, or bank check. You can hold the currency in the brokerage account and wait for the right time to sell it for profit.
- You’ll then select a currency pair to buy and choose the right asset type before proceeding to trade.
- Finally, keep tabs on your investment. Forex markets change within minutes. As a trader, you need to keep track of Investments and act quickly if you sense the market is taking the wrong direction.
Can You Get Rich by Trading Forex?
If you are in search of a get-rich-quick scheme, Forex trading is not it. Success doesn’t just happen in a week, month, or year. Forex trading is a skill that takes time to learn. It also depends on how much money you’re investing. Ideally, as an investor, you should have at least $10,000 of trading capital you can afford to lose. Forex trading is certainly not for people living on low incomes, those who are unemployed, can’t afford to pay their electricity bill or afford to eat, or worse of all, knee-deep in credit card debt. Think about it, if forex trading were that easy, we’d all already be millionaires.
Types of Investments in Foreign Currency
Retail traders can use several tools for investing in foreign currencies. These are some investment options for Foreign exchange –
- Direct Foreign Currency Investing With Options Trading– By using a currency pair, you can buy or sell the currencies on a certain date and at a specific price and time. If these workout in the favor of the investors, they can exercise the option for a profit.
- Investing With Futures Trading– Futures markets work just like options; rather than having the option of a specific time and date, the user experience is obligated to use futures contracts when it is up. Also, you own an asset in futures trading without taking control.
- Investing Indirectly With ETFs– Exchange-traded funds and mutual funds hold bonds and stocks, and they are not limited. ETFs are one of the easiest ways for beginners to invest in foreign currency. These funds purchase and manage a portfolio of currencies on behalf of the investor, using swaps and futures contracts. You can buy and sell instruments that follow the price of underlying commodities like a stock.
- Mutual funds earn interest denominated in the foreign currency, which increases when converted back to local currency if its value increases compared to the local currency.
Advantages and Risks of Investing in F.X. –
Before delving deeper into the market, it is a good idea to look at the advantages and risks.
- A major advantage of the foreign exchange market, leverage is an investment strategy that uses borrowed capital to increase the return of investment. With leverage, investors make profits while keeping the risk capital to a minimum. Choosing an effective leverage ratio is important for long term trading success.
- When it comes to personal finance, you want your investment to turn into cash in no time. This ability of an asset to be quickly converted into cash is called liquidity. And the forex market is high on liquidity since it has more participants than any other financial market in the world. High liquidity lets traders easily convert and move large amounts of foreign currency with minimal price discounts.
- Unlike the stock market, the forex market never sleeps (many forex quotes say that). Open 24 hours a day for 5 days a week, forex transactions are completed between parties directly facilitated by a forex broker, over the counter (OTC). From the Monday morning market opening in Sydney to the Friday afternoon closing session in New York, the continuous marketplace is great if you want to trade on a part-time basis.
- Currency Hedging can be a good way of mitigating loss or limiting it to a known amount. You could use Forex to hedge against loss in other markets, such as commodities. For instance, the U.S. dollar/ Canadian dollar is commonly used as a hedge against falling oil prices since it has an inverse relationship with crude oil.
- F.X. markets are even more volatile than bond and stock markets. Volatility in forex trading is the measure of the range and frequency of sharp price changes over a certain period. If prices fluctuate downwards suddenly, there can be huge losses.
- Interest rates affect countries’ exchange rates. If interest rates in a country fall, its currency will weaken as investors withdraw their investments.
- Another risk is transaction risk resulting from time differences between the beginning and settling of a contract. Time differences allow exchange rate risks to fluctuate, causing individuals and corporations dealing in currencies to face increased transaction costs.
Is it Safe to Invest in Forex?
- When you trade Forex, you put your money at risk in an investment strategy. The ratio of risk versus return is high in Forex trading, even though it can be managed with a prudent strategy.
- An investor can employ an effective trading strategy that includes both stop and limit orders to manage positions.
Can I Trade in Forex for $100?
There are several brokers in Forex trading like FOREX.com in the United States which allow the investor to get started by using a minimum account deposit. Some require as little as 100 USD, which is possible to grow with minimal leverage.
The Bottom Line
Just like any other investment, Forex has its rewards and risks. Beginners in foreign exchange should consider some of the less risky assets before currency trading. It is better to try out Forex trading using a demo account without risking real money. When you are comfortable, you can start trading in the forex market. There are so many factors to be considered, but like anything, with the right amount of research, practice, trial, and error, patience, courage, and discipline, you can set yourself up for trading success.