If you want to invest in foreign currency investment, you can start at the foreign exchange market, also known as the currency market or FOREX (FX). It is the world’s largest financial market, that has over $4 trillion average traded value each day.
And trust me, it’s a huge market that is comprised of banks, commercial companies, central banks, various investment firms, hedge funds and individuals who are looking to “score” big money in foreign currency investment. The foreign exchange market allows its participants to buy, sell, exchange and speculate on various currencies.
Foreign currency investment – what markets are involved?
There are numerous ways an investor can participate in the foreign exchange market. Some of the markets are:
- Foreign currency futures – they are defined as futures contracts on currencies and they can be bought or sold based on standard size and settlement date. Actually, the largest foreign currency futures in the U.S. is the CME Group. They offer futures contracts on G10 currency pairs as well as new, emerging market currency pairs and e-micro products. G10 currencies are 10 of the most average value traded currencies in the world. They are also the most liquid currencies in the world.List of G10 Currencies
- US Dollar (USD)
- Euro (EUR)
- Japanese Yen (JPY)
- British Pound (GBP)
- Swiss Franc (CHF)
- Australian Dollar (AUD)
- New Zealand Dollar (NZD)
- Canadian Dollar (CAD)
- Swedish Krona (SEK)
- Norwegian Krone (NOK)
- FOREX – the forex market is huge and it is highly liquid, as it is a 24-hour open cash (spot) market where currency pairs such as the GBP/US dollar paid, are traded. Since every currency in traded in pairs, investors (banks, central banks, investment firms) are pretty much betting that one currency will go down and the other one will go up.
- ETFs – the long name is exchange-traded funds and exchange-traded notes (ETNs). ETFs can be a single-currency while others buy and manage a group of currencies. Some ETFs even pay dividends.
- Certificates of Deposit – you can obtain foreign currency CDs on individual currencies or you can buy them in a basket of currencies. They allow investors to earn interest at foreign rates of the respected currency.
- Foreign bond funds – foreign bond funds can be defined as mutual funds that invest in the bonds of foreign governments.
- Foreign currency options – last, but not least, we have foreign currency options. This means that they give the option to the holder. An investor can hold it, it is his right, but he is not obligated to do so. He or she can buy or sell a fixed amount of foreign currency at a predetermined price or on a specified date in the future.
Concluding the foreign currency investment
If you are an investor and you are looking for an easy way to invest in foreign currency, you should consider ETFs. Since ETFs are easier to trade with traditional stocks, they have fewer risks that are related top leverage. On the other hand, if you are seeking a more direct, riskier approach to the market, you should consider opening a foreign exchange brokerage account and purchase the currencies directly.
Of course, like all investments, investing in the foreign exchange market involves a significant amount of risk if you don’t know what you are doing.