The Beginner’s Guide to Foreign Currency Investment
Investing is one of the most efficient ways to make money because investors can leverage their funds, sidestep the limitations of time and place, and overcome the constraints of a fixed-cap income.
And one of the most powerful ways of using a small sum of money to make a large amount of money is to invest in the foreign exchange market, also known as Forex. It’s the largest marketplace in the world where you can speculate, exchange, buy, and sell currencies.
Once dominated by central banks, commercial banks, hedge funds, investment management firms, and retail brokerages, foreign currency exchange investments are now open to everyone. Today’s online brokerages offer easy-to-access margin trading accounts to individual investors.
What is Foreign Currency Investment?
Foreign currency as an investment is similar to investing in stocks and bonds because it offers an opportunity for capital appreciation.
These investments level the playing field because, unlike the stock market, Forex news is available in real-time to all investors.
Foreign currency investments also allow those interested in foreign money markets to balance their portfolios, which is particularly important if they have only invested in U.S. equities.
Finally, foreign currency investments provide a hedge against the dollar weakening due to problematic U.S. fiscal, political, and economic policies.
Many people think of investing in foreign currency as a hedge against both national and geopolitical risks.
How does the Foreign Exchange Market Affect Investments?
All things considered, foreign currency investments are one of the fastest ways to grow wealth because the Forex marketplace is the biggest, most liquid market in the world with an average daily volume of more than $4 trillion. Unlike stock, bond, and futures markets, which open and close every day, the foreign exchange market operates 24-hours a day, five days a week.
Still, with high rewards come high risks. The two biggest risks are high leverage and high volatility. Since the foreign exchange market moves in such tiny increments, high leverage via a margin is necessary for direct investors. The market is also buffeted by news of national economic reports and central bank interventions, which creates a high level of volatility.
Many Factors Affect Foreign Currency Exchange Rates
When considering foreign currency as an investment, investors realize that many things can affect exchange rates. For instance, exchange rates are affected by market inflation and interest rates.
A change in a market’s inflation rate will appreciate or depreciate currency exchange rates. The currency of a nation with a lower amount of inflation will have more value. Conversely, the currency of a nation with a higher amount of inflation will have less value.
With an increase in interest rates, a nation’s currency will appreciate, and with a decrease in interest rates, a nation’s currency will depreciate. Higher interest rates give lenders higher rates — this attracts increased foreign capital. As a result, the exchange rate rises. In contrast, a lower interest rate provides lenders lower rates. Since this discourages foreign investment, the exchange rate falls.
Additionally, exchange rates are affected by government debts, terms of trade, and political stability. Sometimes exchange rates are affected by unpredictable things like rampant speculation, war, natural disasters or an unexpected recession.
How to Buy and Sell Foreign Currency
Beginner investors who either want to buy or sell foreign currency should research a few different brokerages when deciding how to invest in foreign money. They should choose a brokerage that has been in business for some time because the company will have acquired experience and know how to take good care of their clients.
Treasury Vault, for example, is a currency exchange company that has been registered with the U.S. Treasury Department since 2011. During this time, we’ve followed currencies from around the world, including those from Afghanistan, Brazil, Chile, Egypt, Iran, Iraq, India, Libya, Mongolia, Saudi Arabia, South Korea, and Vietnam. Since we’ve learned that timing is everything, we strive to make sure we provide customers the currencies they want.
Finding A Foreign Currency Investment Advisor
Besides helping with trades, a broker often serves as a foreign currency investment advisor.
When investors place a currency transaction with their brokers, they can track the course of their investments with several online resources, including visual software.
Monitoring prevents purchasing too much currency at the same time. Overtrading can easily occur when someone invests more than ten percent of the total balance of their accounts.
Monitoring also helps investors heed currency rate trends because it’s easier to make money trading with the trend rather than against it. If, for instance, the U.S. dollar (USD) has been rising against the British Pound (GBP), it’s advisable, unless there are other factors to consider, to sell British pounds and buy US dollars.
When keeping track of transactions, investors record the cost of transactions for their annual income tax filings. They also note the price they paid for a currency and their selling price, as well as the date they bought the currency and the date they sold it. The accuracy of this information can later be cross-checked with the annual statement sent by the brokerage.
What Foreign Currency Should I Invest In?
Usually, seasoned investors focus on the most traded currencies in the world, speculate on the top-trending currencies, and buy promising alternative investments.
The top three currencies in the world right now are the U.S. Dollar (USD), the European Euro (EUR), and the Japanese Yen (JPY).
Although no longer the world reserve currency, the U.S. dollar is still viewed as a global currency, meaning it’s generally accepted around the world. Many people are not aware that on November 30, 2015, the Chinese Yuan was officially recognized as the world reserve currency.
The European Euro, headquartered in Frankfurt, Germany, in the European Central Bank, often viewed as the dollar’s nemesis, is used by the Eurozone’s 17-member countries.
The Japanese yen is technically complex, but it’s also fundamentally simple. Established in 1882, it’s the central bank to the world’s largest economy (the U.S. is the largest based on nominal GDP.)
When it comes to trending currencies, the most promising currencies to short are the Euro, the Israeli Shekel, and the Polish Zloty. Investors who want to go long should consider the Japanese Yen, the Mexican Peso, and Russian Ruble.
Additionally, many investors are highly interested in alternative investments to counter the increasingly volatile stock market. Currencies like the Vietnamese Dong and the Iraqi Dinar attract favorable attention because they are weak compared to the U.S. Dollar and show signs of promising revaluation.
Vietnam is one of the greatest economic success stories in the world when viewed from a rags-to-riches perspective. Devastated after the Vietnam War, this country of about 95 million people has since experienced exponential national economic growth and the Dong is expected to strengthen soon.
Iraq, too, shows signs of recovery after the U.S. invasion overthrew the regime of Saddam Hussein. The country’s new economic growth stems from its wealth of natural resources, particularly its many oil and gas fields now open for business to international trade. Iraq’s increasing oil exports are due to multinational companies investing in the country’s development of natural resources.
The Increasing Popularity of the Digital Currency Bitcoin
Many seasoned investors are also interested in adding exotic currencies to their investment portfolio, and one of the most exotic asset class may be cryptocurrencies.
Bitcoin’s history has dominated cryptocurrency because it came on the scene in 2009 after perfecting secure international financial transactions using encryption and P2P networking. Although there are now hundreds of cryptocurrencies, Bitcoin is the most well-known.
Whether Bitcoin is the best cryptocurrency or the one that will provide the highest ROI is a subject that’s often debated. Many techies argue that Ethereum has worked out an even more robust technology. Time will tell.
What is the Best Foreign Currency Investment?
Figuring out how to purchase foreign currency begins with finding a good a brokerage firm to get immediate access to currency exchange rates and execute trades. Brokers may either charge a flat rate per trade or a percentage of each trade’s value.
Since currency values fluctuate daily, even hourly, quick access to trade and timing are essential for success in short-term currency trading.
When to trade depends on the latest news about international monetary policy. This information impacts how investors value a currency compared to others.
Popular Strategies to Invest in Foreign Money
Two popular strategies for currency trading are arbitrage trades and carry trades.
In an arbitrage trade, an investor will buy and sell the same currency at a different price. Since the price differential is so small, investors focus on a large trade to magnify profitability.
In a carry trade, an investor will sell a currency of a country that has low-interest rates then invest the proceeds in the currency of a country that has high-interest rates.
Which is Better: Short-Term or Long-Term Trades?
Both short-term and long-term trading can be profitable.
In short-term trades, investors focus on trading with currency pairs, trading one for another at the current exchange rates. For instance, an investor in the United States may trade U.S. Dollars for Japanese Yen, Swiss Francs, British Pounds, or European Euros. Meanwhile, traders from other countries might make short-term trades that don’t use the U.S. dollar.
Short-term trades pose high risks and offer high rewards. They are risky because of high market volatility, but this apparent downside is also the very reason why these types of trades can be so rewarding. Since a spike in value happens quickly, it’s possible to rapidly accumulate large gain. The size of these gains is often significant. In fact, it would take months, even years, to accumulate these gains with more conservative types of investments.
In long-term trades, investors focus on positional trading. They look for a trend and then follow it for weeks or months. Sometimes, too, they may follow it for more than a year. Investors make a purchase based on expectations but then sell them based on facts.
A legendary example of the benefits of long-term trading is the story of how George Soros broke the Bank of England. In 1992, he shorted the British pound because he doubted the U.K. would be able to maintain a fixed exchange rate. His hunch proved accurate – when the U.K. pulled their currency from the Exchange Rate Mechanism (ERM) in September, Soros made more than £1 billion.
How Foreign Currencies Affect Your Investment Returns
Foreign currency as an investment is a sound strategy by itself or to balance out a portfolio. What’s more, the cost of entry is potentially low because trading doesn’t always involve paying commission fees. Often costs are based on a bid/ask spread which is usually tighter than in the equity market.
Still, while it’s possible to make a large amount of money through either short-term or long-term trading, investors need to mitigate their trades by using risk management techniques. Additionally, they should keep an ample amount of capital in their accounts to offset the risk that comes from using leverage when trading.