Investing in Foreign Currencies

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Every day, 24 hours, currencies from all around the world are traded in the Foreign Exchange Market or simply Forex. It may appear that trading currencies on the financial market are as simple as transacting with a different country’s currency. However, it’s not as simple as it appears. There are also a lot of currency traders in the market that are betting on the direction of the currencies.

Here are 5 ways how a retail investor can participate in this rapidly changing market:

  • CDs and Savings Accounts

The TIAA Bank offers certificates of deposit (CDs) that allow you to earn interest at rates relevant to a certain country.  While certificates of deposit (CDs) have a greater interest rate, they are more vulnerable to changes in the currency rate. When the CD matures, you’ll be able to get back some of your money. While the FDIC protects you from bank insolvency, it does not guarantee that your currency risk will be zero.

  • Standard Forex Trading Account

Creating a trading account is the simplest way for an individual investor to get involved in the Forex market. To begin trading currencies, you can create an account with a broker. However, keep in mind that the Forex market is very different from the stock market in the United States.

In Forex:

The trading of currencies is done in pairs. You wager that one will rise (long trade) and the other will fall (short trade) (short trade).

  • When you take short bets, there is no uptick rule 
  • There are no regulated currency exchanges
  • There is no clearinghouse
  • As with the position’s size, there is no upper limit. 
  • The dealers make money not through fees, but rather through the spread between the bid and the asking price.
  • Foreign Bond Funds
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In order to generate interest in foreign currencies, mutual funds may invest from time to time in government bonds. Whenever the value of a foreign currency rises against the local currency, the interest you earn increases and is recalculated.

  • Multinational Corporations

Nowadays, a large number of stockholders participate in the foreign exchange market through their ownership of an international company. Coca-Cola, Walmart, McDonald’s, and IBM are household names around the world. Having a stronger foreign currency means that the revenues and gains from international businesses are gaining more traction. As a type of financial reporting, the revenue is being translated back to dollars. Foreign currencies will begin producing additional dollars whenever this occurs.

  • ETFs and ETNs

In the same way that stocks are exchanged, so are exchange-traded notes and exchange-traded funds. Investing in foreign currencies does not necessitate any knowledge of forex trading. With a basic investment account, you can access a currency. ETNs are more like a portfolio of corporate bonds than a collection of stocks.