The Pros and Cons of Investing in Foreign Exchange

Foreign Exchange is one of the most “newbie-friendly” types of investments out there. Learn all about its good business potential and also those that you should be concerned about before getting on board.

If you’re looking to venture into a new type of investment that doesn’t require active participation you may want to consider investing in foreign exchange. The concept, at its most basic, is simple: you buy low and then sell high.

For safety, you can first start learning the ropes of foreign exchange using a demo trading Forex account. This is a great opportunity to familiarize yourself with the system of the trade before you open an actual account, and also work on making your projections for currency movement later on.

‘Buy Low, Sell High’ Explained

To buy low, you must take a look at the value of the currency you are trading as compared to your base currency, or the currency you are using. For example, your base currency is Peso and you would like to trade with multiple currencies like Euros and US Dollars.

Assuming the current exchange rate of Peso to Dollar is 49.51, and you get a projection that it’s going to be weaker by as much as 51.50 the following week, now would probably be a good time for you to go ahead and “buy low.” Then, come the following week, when the exchange rate goes down to 51.50 from Peso to Dollar, you can “sell high.”

That’s easy profit you can earn from the difference of the exchange rate, and you don’t even have to do a thing—just bide your time and wait for the currencies to reach a value most beneficial to you. Here are some other considerations you should factor in before diving headfirst into foreign exchange investment.

PROS

Convenience

You can consider foreign exchange to be on 24/7 since you’re dealing with different time zones from all over the world. As such, you don’t have to be constrained by your regular waking and working hours in order to make the most out of it. There are also foreign exchange mobile apps now available, keeping you updated and making transactions possible even when you’re on the move.

High Liquidity

Forex has a very high level of liquidity, thanks to the high number of market participants. Liquidity essentially pertains to the conversion of assets (as in this case, the value of foreign currency you are trading) to actual cash. The more something is bought and sold, therefore, the more liquid and the easier it becomes to convert your investment into cash. It also helps that Forex in general has a very predictable pattern, which makes forecasting when is a good time to buy or sell your currencies a lot easier.

Low Capital

You can open an account even with a humble amount and then just add to it later on. The best part is that you can earn almost immediately through short-term trades in which, as in the sample above, you can liquidate your Forex assets within a few days.

CONS

Lack of Control Over External Factors

Foreign exchange is directly affected by sociopolitical developments, such as political or civil unrest, a passage of a controversial bill into law, or even an appointment of a particular person to a government post. Apart from learning about how the Forex system works, you should also stay updated on current affairs in the respective markets affecting your investment.

Deregulation

Forex as a market is deregulated, which is a good thing if you consider how it helps keep the costs low and fairly predictable. On the other hand, however, deregulation may also mean a lack of transparency especially in terms of the trader having control over getting the best price. Sometimes, it can even be difficult to have access to trading quotes because these are only provided by select brokers.

Your best bet is to deal only with regulated brokers as these are those professionals who are subject to broker code of conducts and guidelines.