By far, the largest trading market in the world is the foreign
currency market. Speculators make up only a small part of the
spot (cash market) and forward (futures market) currency
exchange transactions. So if you are considering speculating in
this area, be aware that you are trying to out-guess the
brightest minds & supercomputers at large banks and hedge funds;
along with the political whims & expediency of government
treasury departments.
The common portfolio use for holding foreign currencies is to
hedge against the fall of your home currency. For most people,
their salary and all their assets are based in their home
currency - and if that falls in value, so does their entire net
worth and future earnings. For Americans, as an example, there
has been a growing trade deficit with China for many years. And
if China were to allow their currency to fluctuate, the U.S.
dollar would fall against the Chinese yuan in concert with this
trade deficit.
You can also include currency trading as an additional way to
diversify your portfolio. I have read many, many books to learn
about currency trading, and even day-traded the Swiss-Franc for
six months. If you want to learn how to speculate with trading
currencies, you can either try some technical analysis services
(www.currencyprofits.net), or getting a Phd. in economics and
finance, but I can't guarantee that will increase your odds of
success.
I made my only 'very poor man' currency trade prior to the
establishment of the Euro currency in 2002. While driving in my
car, I heard a speech over the radio by the German president
that I felt was certain to cause a short-term fall in the German
Mark. I drove to the nearest AAA Travel Office, and went to the
ATM next door to withdraw $200 in cash to put in my pocket.
Being a AAA member, I then exchanged the $200 for
American
Express Traveler's Cheques that were denominated in German
Marks. Four months later, the U.S. dollar had increased by 10%
on the German Mark. So I took my German Mark cheques to exchange
them back into dollars and cash out with a giant profit. To my
disappointment, the fees for the buy & sell transactions added
up to about 8%, leaving me with a giant $4 profit. So if you
want to try the "Travelers Cheque" route, you'll need a big
trend to offset your transaction fees. More reference material
for this article is available at
http://investing.real-solution-center.com.
The next step up in initial cost is an ETF that is based on the
Euro with the ticker symbol FXE. It is technically a trust, but
it is traded exactly like a stock, and it fluctuates very close
to the USD/Euro rate. When you think the dollar is going to fall
against the Euro, just buy some of these shares to offset your
currency risk, and you can start with one share for less than
$200.
The next way to get access to foreign currencies is to get some
FDIC insured certificates of deposit from Everbank.com. They
offer CDs in over 10 different foreign currencies and a couple
indices, and the minimum investment is only $10,000 for an
interest earning account. So if you are tired of your bank's low
savings account rate, there are currencies that regularly offer
a higher yield without undue currency exchange risk.
Risk a few small steps into foreign currency investments, and
anything dollar-based will feel disappointingly tame. Plus,
you'll have bragging rights with your friends and dinner parties
on your sophisticated investment portfolio.
About the author:
Francis Kier has an MBA in finance and shares his two decades of
experience with investing and personal finance. More of his
articles are available at
http://investing.real-solution-center.com
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest / trade in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading.
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