5 Things to Think About Before Investing in FX

If you are looking for somewhere to invest your cash and you have been thinking about foreign currency as a viable option then this is a great choice. Currency moves all the time and if you are able to tap into what impacts the market anyhow you can best use that information to beat the system then you could make some sizable profits. Now before you get too excited and want to throw all of your money at the potential downfall of the Japanese Yen, there are some things which you will need to take into consideration.

Transaction Costs

Unlike when you by stocks and shares where you need to pay a commission on the sale and cover the spread on it, with FOREX  you will only need to pay 1 transaction cost. For example, if you want to buy shares in Apple at $20 per share (hypothetically speaking of course) you may be quoted $20.20 for the offer, yet when you sell, you will be quoted $20 which is the bid, this means that you have a $0.20 spread on your share dealings. FOREX doesn’t have this spread feature unless you are trading on the ECN, which is highly unlikely. This means that you will have more money to play with and you will need to factor this in.

No Ownership

When you buy share sin a company, you become an owner of a small slice of the company whereas when you buy currency, you don’t own anything. The currencies that you buy and sell are not owned by you because you are betting on the spot market which doesn’t actually take deliveries of currency. Your transactions will be nothing more than digits of the screen of your broker.

Leverage

Leverage on FOREX markets can cause you great wins and sizable losses and you need to fly understand how this instrument works. You may be offered 1:50 from your broker meaning you could turn your investment over by 50 times its value, this is not uncommon in FOREX. The problem with this however is that if you maximize your leverage and buy the full amount available, it only takes a small drop to completely wipe out your investment.

Carry Trading

You need to do your research when it comes to carry trading which is when you receive a higher interest rate on your long bets than the shorts. The basics of the carry trade is that you are borrowing a low-yielding currency in order to help you to fund buying higher-yielding assets from elsewhere in the FOREX spectrum. This is all well and good unless the interest on the long option appreciates to a higher rate of interest than the short, do your research and make sure you know exactly how carry-trading works.

As long as you put in the work when it comes to researching FOREX you should be just fine but don’t go into this with your eyes closed, or you could lose big.