|Investment in forex|
Foreign currency exchange market (forex) is where foreign currencies are traded against each other in large volumes 24 hours a day. For some investors, works like a mechanism that converts one currency to another. The existence of international companies relies on forex market. However, this market is always occupied by speculators who are just after making money. In this article, we are going to explain what forex is and how you can benefit from this market.
The Forex market can be a place for retail investors, brokers, banks and other financial institutions to operate. In this article, we first describe what investing in Forex is, and in the meantime, we introduce five practical ways for retail traders to invest in this market.
Forex standard trading account
Traders and retail investors must first register with a Forex broker in order to have easy access to the Forex market. You can open a trading account in a Forex broker, and trade foreign currencies. This market is different from the stock market in several ways. These differences are:
- Currencies are traded in pairs. In fact, when you buy one currency, you have to sell another currency.
- There is no central exchange for currency trading and no direct oversight body.
- When a currency pair is sold, it does not follow the uptick rule.
- There is no limit regarding the volume of transactions.
- Forex brokers usually make money from the spread rate, until they receive a commission.
Certificate of deposit and saving accounts
TIAA Bank issues a certificate of deposit, which is profitable in any country based on its national currency and interest rate. The bank also offers a certificate of deposit basket containing a mix of different currencies. Finally, TIAA Bank offers a foreign exchange account that acts as a money market account, allowing users to exchange different currencies.
Certificates of deposit are subject to changes in the prices of various currencies, but offer higher interest rates than central banks. When the due date of the deposit certificate arrives, and the value of the dollar has risen, the money you will receive will be less than the money you have invested. The insurance offered by the Federal Deposit Insurance Corporation (FDIC) can protect you against the risk of bank failure, but the risk of price fluctuations in different currencies remains.
Foreign Exchange Funds
There are mutual funds that invest in foreign government securities. These mutual funds provide investors with interest based on their national currency. If the value of the target currency increases against the base currency, the earned profit increases when it is converted back into the base currency.
Investing in foreign securities allows investors to choose their level of risk-taking as well as earn extra profit. This additional benefit can be obtained from the purchase of Merk Hard Currency Fund, Aberdeen Global Income Fund and Tempelton Global Bond Fund.
Many shareholders also invest indirectly in foreign currencies by investing in foreign stocks. Some of the most well-known American companies in the world include Coca-Cola, MacDonald, IBM and Walmart.
Earnings from these stocks will double if the price of that country's currency also rises. This is because the profits from these stocks are more valuable when they are converted from their original currency to your base currency. As a result, if the currency of the country in which you have invested increases, you will make more money.
Exchange traded funds and notes
ETFs and ETNs can be traded as stocks. These two assets can also indirectly allow you to invest in another country's currency. The standard trading account offered by most brokers allows investors to invest in exchange traded funds and securities traded in other countries.
Exchange traded securities are more like securities issued by companies than a fund which consists different stocks. But these securities, such as exchange traded funds, can be influenced by price movements of currencies. In the same exchanges where you can trade exchange traded funds, you can also buy and sell exchange traded notes.
Investment in forex: pros and cons
Investing in Forex, like any other financial market, involves benefits and risks, which we will discuss below. Some of the advantages and disadvantages of investing in Forex are:
- Forex trading is very popular, therefore, this market has a large amount of liquidity.
- Investors are allowed to invest on foreign securities to diversify their portfolio.
- Traders are allowed to use high leverages to magnify their profit.
- Forex is active 24 hours a day and investors can trade anytime they want.
- No central exchange or other organization supervises this market.
- Due to its unsupervised essence, forex traders don’t benefit from full transpaerncy.
- Exchange rate of different currency pairs in forex is influenced by several factors and anticipating trends is complex in this market.
- Using leverage can also increase risk.
- Forex market is volatile.
- Despite the stock market, in forex, traders don’t have access to personal investment advisors.
Answering several questions about investment in forex
What is the advantage of investing in foreign currencies?
The foreign exchange market is very large, and it is easily accessible for beginners. Because each international market has its own working hours, the Forex market is always active somewhere in the world. Due to the high liquidity in this market, the cost of trading foreign currencies is usually very low.
What are the risks of investing in Forex?
Foreign currency risk, or exchange rate risk, occurs when the price of one currency fluctuates against another. Transaction risk also occurs when there is a time lag between the submission of a request for a transaction and its execution. Other risks, such as political risk, are when a currency loses value due to economic or political events.
Is Forex Trading Safe?
The foreign exchange market is highly volatile and carries a lot of fundamental risks. Using too much leverage can also multiply the damage. In addition, before you start trading in the Forex market, you need to identify a reliable Forex broker to be safe from scams.
The value of foreign currencies is affected by international events, and the emergence of new technologies such as the Internet and wireless communication has made it possible for even the smallest investors to participate in this market. Foreign currencies also allow investors to diversify their portfolios. In addition, traders can benefit from changes in the exchange rates of various currency pairs.
If you want to start investing in forex, you should pay extra attention when choosing your forex broker. Aron Groups Broker offers a wide spectrum of financial services, allowing traders to participate in several markets such as energy, commodity, stocks, index, currency pairs, cryptocurrencies, etc. In Aron Groups Broker, you will also be able to create a demo account before entering the real market. Using a demo account, you can test your trading strategies and modify them until you find the best strategy that could make you real money in the real market.
Written by: Mohsen Mohseni (Aron Groups).