ore and more investors buy foreign currencies in anticipation of the value of the US dollar decreasing, especially with the way things are going economically. This is called foreign exchange trading, or forex trading. Over $3 trillion are traded daily in the global currency market.
Forex Trading –
Forex trading is simply buying currency with another currency. By doing so, the investor gets to keep the foreign currency he purchases and benefit if it increases in value. Of course, when his original money increases in value, gains are lower. Investing in foreign currencies is like saving for a rainy day. It’s putting your money somewhere so that it will maintain value while the worldwide currencies fluctuate.
Forex is the most basic form of investing in foreign currencies done simply by trading in pairs. If you choose to trade your dollars for euros, the amount of money you get will depend on the exchange rate at the time. Usually, you have to choose a currency that is higher in value than your money. When the exchange rate is high again, you can sell your euros and make a profit.
Aside from forex trading, there are other ways of investing in the foreign exchange market.
1. Broker. You can place a foreign exchange trade through a broker.
2. ETFs/ETNs (Exchange-Traded Funds/Exchange-Traded Notes). This is an easy way to invest in foreign currencies. Investors take less risk because these funds buy and manage portfolios on behalf of investors through a traditional stock broker instead of a foreign exchange broker. The funds can be bought and managed in single currencies or a group of currencies. You also earn interest every month, which varies from one country to the next. Australia and Great Britain have had high interest rates, while Japan has had low interest rates.
3. Foreign Currency Futures. These are future contracts on currencies that contain currency pairs which can be bought and sold based on a standard size and future date.
4. Foreign Currency Options. Unlike foreign currency futures where you are obligated to buy or sell a currency on a specified date, foreign currency options give you the right to buy or sell a currency at a set price before a specific date in the future.
5. Certificates of Deposit (CD). These can be bought in individual currencies or bundles of currencies and lets investors profit from foreign interest rates.
6. Foreign Bond Funds. These are mutual funds that invest in foreign governments’ bonds. They are usually denominated in the currency of that particular country. If the currency of the foreign country increases compared to the investor’s local currency, earned interest will rise when converted.