A Guide to Investing in Foreign Currency

March 23, 2017 Emma Miller

Up until recent years, institutional investors were largely dominating the foreign exchange, or “forex” for short, and while investing might sound like risky business, it can be a very lucrative venture. Nowadays, you can access capital and make trades with a click of a button through margin trading accounts and online brokerages.

Let’s take a look at what are the key points to always keep in mind while trying to invest, as well as some benefits, risks and most effective ways of foreign currency investment.

Benefits and Risks of Investing

While investing is the biggest and most liquid market in the world, you should be aware of many risks that come with the job, although the benefits can be very rewarding. Because investors are playing with high leverages when investing in foreign currency, naturally, there is a higher risk of loss.

The first benefit is a large and liquid market. The potential for growth and revenue has never been higher than with the foreign exchange market, which is the largest and most liquid market in the world, averaging the staggering US $4 trillion daily.

Secondly, you can diversify away from potential risks that involve the U.S. dollar as an asset class, so the investor can stay relatively safe until the market becomes favorable again.

On the other hand, a high leverage risk is one of the drawbacks of foreign investing. Because the foreign exchange market moves in small increments, those directly involved in investing are running a high leverage risk as a necessity.

Also, high volatility rates are always present due to factors like central bank interventions, economic reports, and other. In order to avoid these risks and improve long-term results, investors should devote their time to learn about risk management techniques.

Investing in Foreign Currency with Exchange-Traded Funds

One of the easiest ways of investing into foreign currency is via ETFs. Using tools, such as future contracts and swaps, these funds purchase and manage a portfolio of currencies for the investors, with benefits of direct investor risk mitigation and the purchase itself can be done via a traditional stockbroker rather than a foreign exchange broker.

Exchange-traded funds have their providers across the world, designed to help people invest in foreign currency. An investor can also make leveraged bets against or for a specific currency or a number of currencies. Investors should make sure to properly examine the ETFs’ before investing in order to learn important information as well as quantify any charged fees.

Investing in Foreign Currency Directly

Using a foreign exchange brokerage, investors can also directly sell and buy individual currencies on margin. Investors are allowed to purchase currency with margin levels that range from 50:1 to more than 10,000:1, with initial deposits as low as $300 to $500. Naturally, there is a greater threat of volatility and loss that comes with greater leverage obtained through margin.

It’s very important for investors to review and choose top-quality forex brokers, as the market in not as firmly regulated as the US equity markets. Therefore, it is generally a good idea to avoid working with foreign brokers who are not regulated by international authorities.

Keeping Up with Economic Trends

Economic trends are one of the most important factors that will determine the positive or negative outcome of an investment. For instance, as the strength of the US dollar has risen since 2014 against other major currencies in the world, especially the Euro, with the exchange rate of $1.052, US citizens have had a great time vacationing in Europe because the cost of exchanging dollars was significantly lower. Another example how healthier economics can lead to increase in foreign currency value is Iraq, resulting in the fact that investors can now sell Iraq currency at higher rates.

In Conclusion

While the foreign exchange market carries a high risk of volatility and loss, new tools and opportunities that can help investors mitigate these risks more efficiently and produce long-term results every day. By using tools, such as ETFs and direct investing, as well as constantly following political and economic trends in the world, investors are able to produce medium to low-risk investments with high-profit margins.

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Emma Miller

Emma Miller is a Sydney based writer with a degree in marketing. Interested in digital marketing, social media, start-ups and latest trends. She's a contributor at BizzMark Blog.