Investing in foreign currencies sounds like an exotic and risky venture. In fact, the foreign exchange (or “forex”) used to be largely dominated by banks and institutional investors. But now, online brokerages and margin accounts readily available has changed everything, by allowing investors access to capital and operating with a click of a mouse.
forex, brokers, skalping, exchange, market, capital, investment, capital, traders,market
In this article we take a look at the benefits, risks and the most effective ways to invest in foreign currencies.
Benefits and risks of investing in forex
There are many benefits and risks to consider before deciding to invest in foreign currencies. Although it is the largest and most liquid market in the world, investors should be aware of the many risks that distinguishes it from the traditional stock markets. Especially the high leverage employed when investing in foreign currency may result in higher volatility high risk of loss.
The main advantages of investing in currencies include:
Large and liquid market. The foreign exchange market is the largest and most liquid market in the world with an average daily volume of more than US $ 4 billion.
Diversification. Forex market offers investors a way to diversify away from the potential risks associated with the US dollar as an asset class.
The main risks of investing in foreign exchange include:
High level. The foreign exchange market is moving in very small steps, making the high leverage (through margin) is a need and a risk for those investing directly.
High volatility. The foreign exchange market is known for high levels of volatility because of economic reports, central banks’ interventions and other factors.
Investors should carefully consider the risk management techniques to help mitigate these risks and improve long-term returns.
easy to invest in currencies with ETFs
Exchange traded funds (ETF) is one of the easiest ways to invest in foreign currencies.
These funds buy and manage a portfolio of currencies on behalf of investors who use tools such as futures and swaps. The advantages are that investors do not have as much risk associated with leverage and buy themselves can usually be done through a traditional brokerage instead of a forex broker.
CurrencyShares and WISDOMTREE are the two largest providers of ETFs designed to help individuals to invest in foreign currency. Meanwhile, companies like ProShares offer ways to make leveraged bets and against several popular currencies. Investors should carefully read the prospectus before investing ETFs to quantify the fees charged and learn about other important information.
Common long ETF to invest in foreign exchange include:
CurrencyShares Canadian Dollar Trust (NYSE: FXC)
CurrencyShares Swiss Franc Trust (NYSE: FXF)
CurrencyShares Australian Dollar Trust (NYSE: FXA)
WISDOMTREE Dreyfus Emerging Currency Fund (NYSE: CEW)
WISDOMTREE Dreyfus Yuan Fund Chinese (NYSE: CYB)
WISDOMTREE Dreyfus Brazilian Real Fund (NYSE: BZF)
Short ETF customary to bet against currencies include:
ProShares Ultrashort Euro (NYSE: EUO)
ProShares Ultrashort Yen (NYSE: YCS)
How to invest in foreign currencies directly
Investors can also buy and sell individual currencies directly in the margin through a currency broker. With an initial deposit as low as $ 300 to $ 500, investors can buy currencies with margin levels ranging from 50: 1 to 10,000: 1 Of course, higher leverage achieved through margin also results in greater volatility and risk of loss.
Here are some resources to get started:
What is Forex Trading?
Choosing a Forex Broker
Trading on margin
Investors should also take the time to browse and choose a forex broker high quality, because the market is not as strictly regulated as stock markets in the United States.
Investors looking for an easy way to invest in foreign exchange should consider ETFs. These funds are easier to negotiate with traditional brokers bag and has fewer risks associated with leverage. However, those looking for a more direct exposure to foreign currencies also open a forex brokerage account and buy coins using margin. There are risks and benefits associated with either approach, investors should carefully consider these factors before making a decision.