Foreign currency investing: guide for beginners

Investing in foreign currencies can be an excellent way to diversify your investment portfolio. Foreign currency trading, also known as forex trading, is generally more intricate compared to trading stocks, mutual funds, or enhancing your strategy with bonds.

What is foreign currency investing?

The foreign exchange market (forex) is where currencies are traded. For multinational companies, this market provides a means of doing business in other countries, facilitating the payment of bills in the local currency. For speculators, this market provides opportunities to take advantage of movements in exchange rates.

A foreign currency exchange rate is a price that represents how much it costs to buy the currency of one country using the currency of another country. Currency traders buy and sell currencies through forex transactions based on how they expect currency exchange rates will fluctuate. When the value of one currency rises relative to another, traders will earn profits if they purchased the appreciating currency, or suffer losses if they sold the appreciating currency.

How do you make money trading currencies?

To make money trading currencies, you must correctly guess that your chosen currency will rise or fall in value against another. You can go long, meaning betting the base currency will rise against the quote currency, or short, meaning you think the base currency will fall in value against its pair.

To improve your chances of success, it's essential to grasp trading strategies thoroughly, practice patience and discipline, and have a solid understanding of the currencies you’re trading. This includes being knowledgeable about their economic environments and staying informed about key dates when economic data will be released.

Forex trading is speculative by nature. Once an investor has chosen a currency pair, they speculate on how much of one currency they can purchase using the other currency in the pair.

For example, if someone buys EUR/USD, they speculate that they may be able to buy more euros now at a lower price using USD than they could in the future. If the price of euros increases, the investor can make a profit. If the price goes down, the investor may lose money.

Reasons to consider investing in currencies

Forex trading attempts to capitalize on fluctuations in currency values. It’s similar to trading stocks. You want the currency you buy to increase in value so you can sell it at a profit. Your profit tied to the currency’s exchange rate, which is the ratio of one currency’s value against another.

1. Diversification
Incorporating currencies into your investment portfolio can help balance it, especially if it is heavily weighted in U.S. equities. For instance, if you anticipate a decline in the dollar's value, you might consider buying currencies that you expect will appreciate. Unlike stocks, which fluctuate independently, currencies move relative to each other; if one currency is gaining, another is losing.

2. Level Playing Field
Unlike the stock market, where insider information can offer an edge, the forex market operates on a level playing field with real-time news accessible to all participants. The forex market is open 24/7 globally, and currency values are influenced by actual economic events and monetary flows, allowing you to analyze how these factors might affect a currency’s value.

3. Global Economic Hedge
With growing concerns about U.S. fiscal and monetary policies potentially leading to inflation and a weaker dollar, the currency market provides an opportunity to hedge against these risks. Currency traders closely monitor developments like budget deficits, low interest rates, and Federal Reserve policies.

4. Capital Appreciation
Currencies, like commodities and stocks, offer the potential for capital appreciation. You can profit if the value of your chosen currencies increases relative to the dollar, but you will incur losses if they decline.

5. Hedge Against Political and Event Risk
Currency trading allows you to strategically respond to global events and political changes. Factors such as leadership changes, interest rate adjustments, currency revaluations, geopolitical conflicts, trade sanctions, and health crises can impact currency values. By evaluating these events, you can position your investments to mitigate risks or capitalize on potential opportunities.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.