A Guide on How to Invest in the Currency Market
- Reasons You Should Invest in Currency
- Tips for Investing in Currency
- Benefits and Risks of Investing in Currency
Additionally, it’s a great way to diversify your portfolio. If you are interested in exploring your investment options in this asset class, read on. This guide takes you everything you need to know about investing in currency.
Reasons You Should Invest in Currency
Making investments in currency was traditionally a task reserved for well-financed investors of multi-national corporations. Today, via online brokerages and readily available trading accounts, even you can access the market and start taking advantage of the movements in exchange rates. Here are some of the reasons why you should consider foreign exchange investments.
- Hedging Capabilities
- Offers a Level-Playing Field
- Capital Appreciation
As pointed out earlier, investing in foreign currency is a great way to diversify your portfolio. For instance, if you believe that the Euro will depreciate in value in the future, you can purchase two or more alternative currencies that you think will appreciate in value.
Based on your market analysis, you can play currencies against each other hedging yourself from economic problems such as war, political upheavals, trading sanctions, and tariffs, recession, etc.
Unlike the stock market, the foreign exchange market is a 24/7 market. Therefore, it’s accessible to everyone. Currency valuations are driven by the forces of demand and supply along with events that influence their value. Thus, you can conduct your own market analysis in the piece without the fear of “insiders.”
Currencies are comparable to stocks and commodities as they offer the potential to earn profit. If the value of your currency asset in possession rise in value, then you will profit.
Tips for Investing in Currency
Currency investments are excellent portfolio diversifiers. However, due to the large of misconceptions and missteps available in the market, it’s easy for an investor to get misinformed. Thus, as an investor, you need to get the right kind of information before trading or buying any currencies. Here are several tips to get you started:
- Consider talking to a financial advisor to gauge whether investing in currencies is healthy for your portfolio. Luckily, finding a financial advisor is not as hard. You can easily find one online or reference it through a friend.
- Invest in currency exchange-traded funds (ETFs). This is especially convenient if buying and selling in the forex market are challenging. Currency ETFs are less risky and tax-efficient than other investment assets.
- Avoid the allure of Leverage or Margin, at first. Once in the market, you will start to find out the advantages of using leverage or margin and having a greater earning potential. In the beginning, only trade with cash that you have. Later on, once you have learned how to mitigate losses, you can then try leverage or trading on margin.
- Stick to the Majors. There are many currencies available for trading. The best bet would be to stick to major and stable currencies. Currencies from unstable countries tend to carry a huge amount of risk. A great example is Argentina, which was a popular trading currency before its banking system got shut down in 2000.
- Choose a Broker. If you are not 100% comfortable tackling the market on your own, then it’s wise to choose a broker. Make sure the trader is a real expert and is regulated to lower your risks of losing your capital.
Benefits and Risks of Investing in Currency
The benefits of investing in foreign currency include:
- Excess Liquidity: The foreign exchange market is the largest and most liquid market in the world. It has an average daily volume of over $5 trillion.
- Diversification: Investing in foreign currency offers investors a great way to diversify their portfolio and successfully mitigate the risks of other asset classes.
- 24/7 Trading: The forex market operates 24 hours a day. That means you get to have more hours trading than what other markets (stocks, bonds, futures) offer.
- Low Costs: The foreign exchange market offers low costs to entry and doesn’t involve paying commission.
The risks of investing in currency include:
- Volatility: The forex market is notorious for experiencing high levels of volatility that results from economic reports, news, etc.
- High Leverage: The foreign exchange market offers the highest amount of leverage compared to other markets. Since the market moves in extremely small increments, this makes leverage, through the used margin, a necessity. For those investing directly, this is a huge risk.
As discussed earlier, the currency market has a high reputation of being extremely volatile. Therefore, before investing in currency, make sure you talk to a broker who can help you determine whether or not this type of investment is appropriate for you. It’s also helpful to have a personal perspective of how the market works. The more you understand, the more informed your choice will be. All in all, long-term currency investing is a great option to make a living these days.