How to Start Investing in Currencies
Investing in currencies may sound like a lucrative, exotic venture - and it can be - but it takes knowledge, skill, and experience to succeed. At one time, the forex market was largely dominated by institutional investors and banks, but now, there are online brokerages and margin trading accounts that have made this form of investing accessible to everyone.
There are many benefits to investing in the currency. The market is the largest and most liquid in the world, boasting a daily volume of more than $5 trillion. The foreign exchange market offers an opportunity to diversify your portfolio, and you can trade at any time of the day.
But how does one get started with this type of investment?
Direct Investment in Currency
Many forex traders choose to invest in currency directly through a foreign exchange brokerage. Initial deposits may be as low as $300-$500, and you can buy currencies with margin levels that range from 50:1 to over 10,000:1.
While investors have more control when they go this route, there's also greater risk. It's important to take the time to review brokerages before choosing one. The market isn't as stringently regulated as equity markets, so it's important to choose a reputable brokerage.
Investing in Currency Indirectly
If you don't have the time or inclination to learn everything you can about the foreign exchange market, you can invest in the market indirectly through ETFs, or exchange-traded funds.
ETFs are the simplest and easiest way for non-experts to invest in currency. These funds purchase and manage a portfolio of currencies on behalf of investors.
With ETFs, you don't have to worry about leverage-related risk, and the purchase can take place through a regular stockbroker.
There are also mutual funds that invest in foreign government bonds, and these earn interest that's denominated in the currency. If the currency's value increases relative to your currency, the earned interest will also increase when converted back to your currency.
Currency hedges can protect against losses related to currency movements that may wipe out your gains. Hedging can eliminate some of the benefits of diversification, but can also mitigate some of the risks associated with currency investing.
While not the right choice for every investor, hedging is worth a consideration.
Another indirect way to invest in foreign currency is to buy stock in multinational corporations that do a large chunk of business in other countries, such as McDonald's, Walmart and Coca-Cola.
Profits and revenues from these overseas operations will be boosted if the foreign currency appreciates versus the dollar. These revenues will be converted back into dollars for the purpose of financial reporting. Stronger foreign currencies will yield more dollars when exchanging back to the dollar.
Currencies are a great way to diversify your portfolio, and there are several ways to go about it. If your risk tolerance is high, you can invest directly into currencies. Those with lower risk appetite can choose an ETF or stock in multinational corporations to take advantage of the foreign exchange market and its benefits.