Recent technological advances, and changes to the way that we conduct trading, have resulted in more people accessing various investing opportunities. One of the asset classes gaining in popularity recently is currencies. If you want to invest in foreign currency, it is relatively easy to get started.
Trading Foreign Currencies
The first thing you have to realize about foreign currency investments is that they aren’t really investments at all. The language of foreign currency trading is couched in investment terms, but you aren’t actually trading anything at all. Instead, you are basically speculating about how currencies move in relation to each other. You make or lose money based on whether or not you are correct. For the most part, forex brokers don’t charge transaction fees or traditional commissions; instead, many of them make money on the bid-ask spread.
As a result, of this reality, the US dollar can be both up and down at the same time. You actually “trade” currency pairs. One of the more common pairs is the euro/US dollar pair, or EUR/USD. If you think that the euro will gain against the dollar (all quotes are made based on the first currency), then you “go long” on the pair. If you are right, and the euro makes gains against the dollar, then you profit. How much you end up with depends on how much the euro gains between the time you enter your position, and the time you exit.
If you think that the dollar will gain, though, you short the EUR/USD currency pair. You earn money as EUR/USD loses ground. However, because each position is entered (and exited) based on a single pair, you can trade multiple currency pairs at one time. You might think that the euro will gain against the US dollar, but lose ground to the Canadian dollar. So, you can go long on EUR/USD, while shorting EUR/CAD. You believe that the euro with both “win” and “lose” — at the same time.
Opening a Forex Trading Account
If you want to trade foreign currencies, you can open an account with a forex broker, and begin trading that way. There are a number of forex brokers out there, and Zecco (now TradeKing) actually offers forex trading opportunities.
Before you begin trading with your own money, though, it is usually a good idea to practice with a virtual account. Many forex brokers offer practice accounts with between $10,000 and $50,000 in virtual currency. This can help you get used to the trading platform used, as well as develop forex trading strategies. Learn the ropes before you start trading.
Foreign Currency ETFs
If you aren’t interested in trading currencies with a broker, it is possible to invest in foreign currencies with the help of Exchange Traded Funds. There are ETFs that allow you to invest in a basket of currencies, or invest in currencies with certain characteristics. There are ETFs that focus on emerging market currencies, as well as those that specialize in commodity currencies.
There are brokers that offer low-cost and commission free ETFs centered around currencies. E*Trade and TD Ameritrade are two brokers that have a decent selection of currency ETFs.
Before you invest in foreign currency, whether you trade on the forex market or invest in a fund, make sure you understand some of the fundamentals that affect the currency markets, and learn the risks associated with foreign currency trading.