A beginner's guide to investing in currency

The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.

If you’re thinking of investing in foreign currency, you first need to understand the market, its features and dynamics. Only then, will you be able to gain attractive returns. 

Now, Forex currency trading can be a bit more complicated for you than say, investing in mutual funds. That said, once you learn the basic principles, it won’t prove to be that hard. This foreign currency trading guide is for people just like you and me as well as novice investors looking at bigger and better avenues for investment. So, let’s get started.

What Is Currency Trading?

Money matters and it wouldn’t be too farfetched to say that money makes the world go round. Now, the Forex market is the biggest digital market in the world, where people can trade one currency for another. But why do we need to exchange currencies? Currencies are exchanged every moment of the day to conduct international business, buy goods and avail services in different countries to name a few. When you go to a foreign country for a vacation, you need to exchange your currency for theirs in order to buy their goods and avail their services, right? This is where, the need for the foreign exchange market arises; it determines how much of a country’s foreign currency you can get, in exchange for your own. So, in a nutshell, the values of domestic currencies vary, which is why we need foreign exchange services and trading.

A Brief History 

The Forex market has been in existence since the evolution of money. But that was Forex in it most primitive form.  The Forex market underwent a major overhaul in 1971, which led to many more major currencies being floated on the platform.

Today, central banks of all these countries, along with the commercial and investment banks across the length and breadth of the globe trade on the Forex market.  Moreover, there are a plethora of opportunities for retail investors to leverage as well.

Can Individuals Trade Currencies?

The internet has truly acted as a catalyst in enabling individual investors to trade in foreign currencies. Before the internet, the majority of traders on the Forex platform were large financial corporations, and high net individuals as it required a large amount of investment.

But thanks to the internet, today we have a large retail market for individual traders. Individual or retail investors can now easily approach banks or brokers to start trading in currencies. 

How is money traded?

Basically, there are three ways in which money is traded on the Forex platform:

• Spot market

• Forwards market

• Futures market. 

Of these three, the spot market is the most well known, as it has been operating for years. Just remember that the spot market is the foundation on which the other two markets have been built. . Usually, when you come across people discussing Forex trading, more often than not, they are referring to the spot market. On the other hand, the forwards and futures markets are more common with companies.

Pros and Cons of the Forex Market

Pro: Registers the largest daily trade volume in the world, offering the highest liquidity. This enables you to enter and exit the Forex market in a jiffy. 

Con: Banks, brokers and dealers allow a high leverage. Now, what this means is that traders can control large positions with a relatively small amount of capital. 

Pro: Operates 24 hours a day, Monday to Friday.

Con: You need to have sound knowledge before entering the Forex market. Be well informed of the basic economic principles and have a clear understanding of how global economies work together as well as their interconnectedness in terms of currency values. 

Now, that we have had a quick run through of the Forex market, take a moment and think about what you want to do with your money. Keeping all your money in just one Investment Avenue is not prudent. Diversifying your investments is key to have a portfolio that gives you lucrative returns. Axis Direct’s latest Currency Derivatives offers you this opportunity to have a diverse portfolio. The Currency Derivative acts as a contract between the seller and buyer and its value is derived from the currency value. 

Benefits of Currency Derivatives: This investment option offers hedging opportunities to exporters and importers, who can hedge their future receivables and payables. Opening you up to such a wide array of market players, our Currency Derivatives provides currency trading opportunities to the players because of its multiplicity and volatility.

References:

https://www.tradingwithrayner.com/forex-trading-for-beginners/

https://www.investopedia.com/articles/forex/11/why-trade-forex.asp