The Best Ways to Invest in Foreign Currency
August 14, 2019 (Investorideas.com Newswire) It's a misconception that institutional investors and banks are the only ones that can access foreign currency investments. Although large financial institutions still dominate the foreign exchange market, individual investors can trade through margin trading and the help of online brokers. Individual investors who understand how foreign currency trading works will benefit more in this risky yet profitable venture.
Fortunately for regular folks like you and me, it's now possible to invest in foreign currency. There are reputable online forex brokers that accept wire transfers when you want to fund your trading account. When dealing with an online broker based in Australia, for example, there are convenient ways to transfer money to Australia without leaving your home or office.
This article gives comprehensive, but easily digestible, information on the best ways to invest in foreign currency.
Foreign Currency Investments Overview
Institutions have been actively engaging in foreign exchange (forex) investments for a long, long time. Although foreign currency trading was initially only open to large institutions, it has become accessible to the general public, thanks to the Internet. Technology played an important role in making forex trading readily available to individual private investors. What makes foreign currency trading a good investment option is that it's the most liquid market in the entire world. The forex market is said to buy/sell trillions of dollars worth of currencies in 24 hours.
Foreign Currency Investments: How it Works
Investing in forex is similar to investing in stocks because investors are hoping the value of currencies will go up (bullish) or down (bearish). There's a slight difference in forex trading which can confuse new investors. In essence, in foreign currency trading, you'll be bullish in a particular currency and bearish towards another currency.
The forex market isn't controlled or regulated by any governing entity. The exchange is simply an agreement between two parties. Despite being completely unregulated, the forex trading industry seems to thrive and operate successfully, which is quite impressive. The forex market is one of the best examples of a free market and something that should be emulated by other markets as well.
The Forex (FX) market is suitable for both new and experienced investors who are looking for a way to diversify their investments. If you have zero experience in forex trading, you should start understanding the basics by practicing forex trading with a demo account from an online broker. It's vital to familiarize and understand how the trading system works before opening your real trading account. To succeed in foreign currency investing, one must honestly know how it works.
- Forex investments, compared to stock investments, don't require active participation.
- There's a simple and straightforward concept to keep in mind: buy low, sell high.
- To buy low and sell high requires making projections for your base currency versus the value of the money you want to trade. For example, if Peso is your base currency, then you'll be buying with another currency like the US Dollars.
- If the current exchange rate of the Peso is 49.20 to one US Dollar, you'll try to come up with a projection whether the exchange rate will go up or go down. If you project that the US Dollar will be around 51.25 in the coming week, you'll then buy low. If the exchange rate indeed becomes 51.25 by the following week, it will be the time to sell high.
The profits in foreign currency trading are a result of the changing market exchange rate. Forex trading doesn't require too much participation since you need to wait for the exchange rate to change before buying or selling.
Reasons to Participate in Forex Currency Trading
If you haven't tried investing in the forex market, here are the reasons why you should start now.
- You can participate in forex trading to diversify your investment portfolio.
- Make projections using information readily available to anyone, such as the economic health of a country. No “insider” information is necessary.
- You're allowed to invest in multiple currencies so you can make a profit based on the changing global economy.
- Currencies are sound investments, as most are considered commodities. Therefore, your capital has the potential to appreciate over time.
- You can get significant profit from your forex investment by carefully assessing world events such as fluctuations in interest rates, revaluation of currencies, political changes and upheavals, tax and policy changes, recessions, health-related issues around the world, and more.
The Best Ways to Invest in the Forex Market
The currency market, or the FX market, is the largest financial market in the world. It allows participants to buy and sell currencies based on speculations and projections. Major investors are central banks, commercial banks, commercial companies, and hedge funds. Nowadays, individual private investors are now also trading currencies with the help of forex brokers online. It's possible to invest in the forex market in several ways:
In forex, currencies are traded in pairs, such as Euro and USD, for example. FX traders and investors are buying and selling money based on the current exchange rate. In a currency pair, one currency is projected to go up, and the other one is expected to go down.
- Foreign currency futures
Foreign currency futures are also called FX futures or foreign exchange futures. In this method, the currencies are exchanged at a specific date using the exchange rate during the currency's purchase date.
- Foreign currency options
Foreign currency options allow the buyer to buy or sell their currencies at a specified time at a fixed price.
- Exchange-traded notes (ETNs) and Exchange-traded funds (ETFs)
An ETF is an investment fund traded at stock exchanges. On the other hand, an ETN is a bank-issued bond that relies on the market index.
- Certificate of Deposit (CD)
A foreign CD is a bank-issued fixed-term deposit product that lets investors keep their foreign currency for later use. A foreign certificate of deposit hedges the fluctuations of the FX market. Money invested in an FCFD can't be redeemed before the term expires.
- Foreign Fund Bonds
Foreign bonds are mutual funds invested in foreign government bonds. The denomination used in foreign bonds is the currency of the involved country.
Investing in foreign currencies have specific benefits and risks. There are different ways to invest in foreign currencies, but without the proper training and knowledge, you won't be able to trade successfully.
Foreign Currency Investments: Pros and Cons
Understanding the pros and cons of foreign currency investments will help you evaluate whether you should participate in forex trading.
Pros of Foreign Currency Investments
- Convenient: You can invest in forex trading anywhere in the world, at any time of the day.
- High liquidity: Because there are so many participants in the forex market, forex investments are considered very liquid.
- Low capital required: The great thing about forex investments is that you don't need to shell out a large amount of cash just to get started. You can start with a small amount and then add more as you move along.
Cons of Foreign Currency Investments
- External factors: The forex industry is highly-influenced by sociopolitical events that no one can control. It's thus imperative to always be informed about changes and developments in world affairs.
- Lack of regulation: The foreign currency market isn't regulated by any governing authority, which in itself has its own set of drawbacks and benefits.
Practical Tips in Managing Foreign Currency Investments
To be a successful foreign currency investor, keep the following in mind.
- Before investing, you should know what your financial goals are. It includes defining your risk tolerance and managing expectations.
- Goal setting is essential, but goals should be clear and achievable - understanding how the forex market works will help you better plan your goals.
- Work with a reliable broker that allows you to manage your investments efficiently. There are several forex brokers, but not all of them will suit your specific trading style.
- Take small steps -- you can increase the size of your portfolio as you go along. If possible, use organic profit or gains to grow the size of your investment portfolio.
- If you have no experience in trading currencies, focus on trading one currency pair first, which can include your country's currency. Avoid investing in multiple currencies if you're a novice investor.
- Take note of your failures and successes. Even the world's most experienced investors have experienced losses on their investments at some point. Mistakes will help you become a better forex trader, while success will teach and instill in you the best trading practices.
Investing in the foreign exchange market requires the right knowledge and skills which can be acquired by training and experience over time. But more than these, an investor should have discipline, determination, and grit to survive the forex market. In taking your time to understand this new type of trading you can eventually become a master and reap the rewards over time.
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