“Many of my friends are talking about making lots of money in currency trading. However, I feel a little nervous about it, because I have seen all the advertisements telling us to be careful how we invest our money. Is investing in foreign exchange trading really legal, and why has it become so popular recently?”
Jamaicans are usually never far behind in following the international trends, whether it is the latest car, clothing line or hit music. It was only a matter of time before we discovered that there was money to be made in the financial world’s largest and fastest growing market – trading in foreign currencies.
Foreign currency trading, also called forex, currency market, foreign-exchange market, or just simply FX, has until recent years been carried out only by big financial institutions, large conglomerates and central banks. However, the growth of the internet and the increase in investors’ knowledge and appetite for risk, has allowed many average people to take advantage of this investment opportunity.
What exactly is the forex market anyway? According to www.abc.money.co.uk , foreign exchange currency trading is the practice of exchanging one country’s currency for another country’s currency. The forex market is simply where this currency exchange happens. However, forex trading doesn’t have a physical location, unlike many other financial markets. It is carried out ‘through an electronic network of banks, corporations and individuals.’
The forex market trades approximately US$ 2 trillion daily, 24 hours every day, from Sunday to Friday. It is bigger than all the world’s stock markets combined, making it the largest and most liquid (easy to enter and exit) financial market. One of the reasons that this market is so viable is that countries all over the world need to exchange currencies in order to trade with each other. It is also very active because when the trading day ends in one country it is beginning in another, allowing investors to trade continually throughout the day.
Forex involves four main variables; currencies, exchange rate, time, and interest rate. As www.abc.money.co.uk explains, “the objective is to exchange one currency for another in the expectation that the price will change so that the currency you bought has increased its value relative to the one you sold.” If the currency which was bought increases in value, the trader will have to sell back this currency in order to ‘close a position’ and realize a profit.
How is it possible for investors to reap the reported super-normal profits in forex? One of the reasons is that the market offers many trading opportunities from the several currencies that move up and down constantly. Speculators can have a field day making trading decisions that can lead to high returns, but also bring high risk for loss. It also allows investors to use leverage, or to borrow more than they actually have, and invest larger amounts. The smart investor can make profit when the market is rising as well as falling.
So now that we know what forex trading is, how can the average investor benefit? It’s very important to understand that forex is not for the casual investor or the faint-of-heart. An investor must be very knowledgeable of how all the factors affecting the market perform together in order to reap the benefits of forex trading. As with any other investment such as stock market trading or operating your own business, if you have not learnt the basics and gained experience, you can lose money.
The good news is that there are many opportunities for those who wish to trade their way into a fortune, to learn the techniques for success. Training sessions are advertised regularly in the local press, and you can also get educated through online courses. After you are comfortable that you have understood the procedures necessary to trade currencies, it would be a good idea to start a demo account to try your hand before you actually invest real money in the market. Getting started with actual trading is also very simple, as there are about two dozen sites that offer online trading accounts. Check out how these sites rate by locating an online rating website such as www.forex-ratings.com so that you can choose the right broker for you.
However if you are like most people, who really only want to go a marketplace to buy food or clothes, then trading currencies might be too stressful to attempt on your own. You might be enticed to give your money to persons who promise high returns, but be forewarned that not everyone will be successful in their attempts to trade currencies. Make all the necessary enquiries and do due diligence just like you would with any other investment, and be very careful where you put your money.
Cherryl Hanson Simpson is a financial advisor living in Jamaica, West Indies. For more financial articles see her blog Smart Finance Jamaica.
Copyright © Cherryl Hanson Simpson.