The world economy has witnessed several changes over past few years – economic scandals, global meltdown, and the closure of 100 year old companies. This dynamic pattern necessitates the need to identify new investment strategies in order to minimize risk and at the same time maximize returns. Investors have learned that this is a game of patience and those who survive in the long run emerge as winners. Perseverance, tenacity, and good strategy are the key qualities that help investors excel in the FOREX Market. In this piece we will explore the following:
Key ingredients of the FOREX market
Some statistics pertaining to the FOREX market
FOREX market from the investor’s perspective
Types of Trading Accounts
Foreign Exchange Currency Market, commonly known as the FOREX market has emerged as an easily accessible trading opportunity where investors directly trade on currencies. It is a market operative round-the-clock, where an investor can access through the World Wide Web and other modes of telecommunication. As in every form of commerce that takes place in today’s world, trading involves a commodity. Long ago, when the concept of money/currency was not there, trade took place according to the Barter system when goods or services were exchanged on mutual agreement between two trading parties. FOREX market is something quite similar. Two currencies are traded at the market defined rate. This essentially implies that currencies are traded in pairs, that is, one currency is bought and another sold though inter-bank market based on the prevalent rate (also known as the floating rate).
The interesting thing about inter-bank market is, it is not centralized and does not take place at a single exchange, implying that there is no physical location. Owing to the internet, trading can take place online and individual investors can very well participate in FOREX market and it operates round-the-clock.
The trading format for FOREX is Spot Market where the instrument is bought and sold at the current (immediate) price. In case of FOREX, the instrument in question is the currency composition. The commonly trade currencies are United States Dollar (USD), Euro (EUR), Great Britain Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), Australian Dollar (AUD), Japanese Yen (JPY), Swedish Kroner (SEK), Hong Kong Dollar (HKD), New Zealand Dollar (NZD), Singapore Dollar (SGD).
A quick peek into some of the facts & figures will give us an idea of the gigantic size of the market:
As per the last Triennial Global Central Bank survey released by Bank of International Standards (BIS) in April 2007, where the data was collected 54 Central banks and monetary authorities, the turnover in traditional foreign exchange instruments is at $3.2 trillion. (http://www.bis.org/publ/rpfx07.htm)
The survey of North American Foreign Exchange Volume released in July 2009 by the Foreign Exchange Committee has declared the average daily volume in total over-the counter foreign exchange instruments (including spot transactions, outright forwards, foreign exchange swaps and options) are at $527 billion. http://www.newyorkfed.org/404/404.cf)
The survey of North American Foreign Exchange Volume released in July 2009 by the Foreign Exchange Committee has declared the average daily volume in total over-the counter foreign exchange instruments (including spot transactions, outright forwards, foreign exchange swaps and options) are at $527 billion. (http://www.newyorkfed.org/404/404.cfm)
The following pointers go on to reason as to why an investor should invest in FOREX market:
Easy Access: All you need is a computer and an internet connection!
Round-the-clock presence: A very unique aspect is the sun never sets for the FOREX market. Somewhere in the World the market is always operative and trading can happen anytime.
Liquidity: A trading volume of $2.3 trillion makes it the most liquid market. The sheer volume makes the market very fast, where entry and exit is easy with steady execution of transaction. The liquidity also contributes to price stability attributable to the huge volume. It is good to be aware that volatility does exist, and that is the time when patience comes handy.
Flexibility: There is no decided magnitude of the trade. This permits the investor to
Leverage: A leveraged trading allows the trader greater buying and selling capability. This implies that bigger transactions can be made with relatively smaller deposits. Bur higher the leverage, higher is the risk. A 200:1 leverage implies that the individual trader requires 1/200 of the transaction amount to open a trading (plus floating losses of-course!)
Limited Focus: The commonly traded currencies being not more than ten, FOREX instruments are also limited. Information regarding instruments becomes easy to analyze.
Low transaction charges: Competition being intense, brokers do not charge any separate fees. The make money through spread (more on that later) and some charge commission. But these are small amounts given the huge nature of transactions.
Low investment: The start-up cost can be pretty less and there is no hard and fast rule about the initial amount.
A key requirement to have a successful stint in FOREX market is choosing a trading account appropriate to the investor’s profile. Each investor is unique in his own way with respect to overall financial health, risk appetite, personal assets & liabilities, investment psyche. An investor can explore all the options available and choose the one that suits his or her profile most. The common accounts available for FOREX trading are Mini Account, Standard Account, and Managed Account.
Mini Account is for investors who do not want to invest more than $500. This feature allows investors with lower risk appetite to trade in FOREX market. Besides, the broker also offers 400:1 leverage, implying that with $250 investment, an investor can transact up to $10,000. The only thing for an investor is with low risk, the possibility of profits also remain low. Standard Account commonly has investors investing about $1,000. With a 100:1 leverage offered by the broker, the transaction amount is $100,000. The possibility of profit is more in this account compared to a mini account, and so is the probability of loss. The brokers also offer more value-added service for this account.
Managed account is a third variety, and mostly popular with investors who do not have enough time to manage the operations, hence have a dedicated FOREX professional looking after investments. Such things come with a heavy price, hence there is a heavy fee to be paid by the investor and lacks the flexibility of trading. On the other hand investors benefit through professional advice. These accounts are of two types:
a) Pooled Funds – Multiple investors’ capital is pooled in, and invested in a mutual fund. The accounts are further classified based on the degree of risk.
b) Individual Accounts – Accounts managed by a FOREX expert for an individual investor.
Therefore, it is of extreme importance to choose a suitable account according to the investor profile.
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Chillibreeze's disclaimer: This is a contributed article and was published on Chillibreeze in January, 2011. The views and opinions expressed in this article are those of the author(s) and do not reflect the views of Chillibreeze as a company. Chillibreeze has a strict anti-plagiarism policy. Please contact us to report any copyright issues related to this article. The relevance of the facts and figures cited (if any) could change after a period of time.
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—About our writer:
Pratima Chaudhuri has a post-graduate degree in Economics and works as a Project Manager with an MNC in Bangalore. She has over 6 years of experience in the areas of content writing, article writing, academic writing, e-books, tutorial, and developing web content.
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