5 Ways to Invest in Currencies (Updated August 2021)

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As of April 2021, the Triennial Central Bank Survey reported the exceptional expansion of the forex and over-the-counter (OTC) derivatives market. At that time, the global turnover of the industry reached US$6.6 trillion, a roughly 25% growth rate compared to the year 2016. Admittedly, forex is acknowledged as the world’s biggest money market due to its higher liquidity and fewer restrictions than other fellows. In which ways they may enter the market is a common query of many people. All information will be detailed in the article.

Can I Invest in Currency?

In the past, currencies were mainly regarded as a vehicle of exchange for merchandise and services rather than a product that people could invest in or speculate on to make money. However, the gradual evolution of the financial industry has accompanied the coming of new financial products and derivatives, even including currencies.

Despite the market’s diversification into customer segments, the forex industry is generally dominated by large banks, followed by hedge funds and investment management companies. The vast majority of foreign currency flows circulate between those institutions for plenty of activities. Historically, merely high-net-worth investors who built up a strong relationship with banks were likely to engage in the fray. Today, the global forex market has witnessed an outstanding increase in retail customers, regardless of experience or capital. This is attributed to assorted methods to invest in currencies and their derivatives – whether directly or not.

Indeed, the forex and OTC market recorded the highest participation in spot transactions and FX swaps, of which the US dollar (USD), Euro (EUR) and Japanese yen (JPY) were the most actively traded instruments. Besides, the graph below indicated a steady rise in outright forwards, options and currency swaps.

(Source: Bis.org)

Considered the most liquid asset, currencies are less bound by strict regulations than other investment products. However, this competitive advantage accompanies specific risks, especially during economic turbulence. Therefore, you should base suitable investment methods on your risk tolerance, capital volume, experience and understanding of the forex market.

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Keeping in mind that currencies in this article refer to monetary units legally issued by governmental bodies and under severe management afterwards. Meanwhile, since the creation of cryptocurrencies such as Bitcoin or Ethereum, many people have erroneously thought of this instrument as a kind of currency. But in fact, it is a digital asset whose movements are harder to predict. Therefore, when it comes to forex instruments, crypto is excluded.

5 Ways to Invest in Currencies

Some popular ways to enter the forex market involve speculating on currency pairs, investing in foreign funds and many more.

Standard Forex Transactions

Most forex participants are in favour of directly trading currency pairs by implementing Contracts for Difference (CFDs) transactions. This measure allows individuals to “buy” and “sell” without their possession of physical forex pairs. Their ultimate aim is not delivering or receiving these instruments, but rather taking a venture on price fluctuations to generate profits.

Today, currency speculation has won massive popularity. According to Bernard Lietear’s comments on the International Forum on Globalisation (IFG) seminar in 1997, most foreign exchange transactions were carried out by institutional and individual entities for commercial or travel purposes, versus nearly 20% for speculative trades. The situation was reversed though with a boom in currency speculation activities (97%).

There is something to be said for trading foreign currencies as follows:

  • Free Trading Platforms

Regularly, traders take up forex transactions on proprietary or third-party trading platform offered by institutional mediators. Accordingly, forex speculators will sign up for a free trading account before choosing to do paper or live trades. It can be said that demo accounts are a unique feature of standard forex transactions. Due to unprecedented changes in the pair value, novices may get attuned to the market and test their trading strategies multiple times before going to real transactions.

  • Low Margin

Compared to other financial products like stocks or bonds, foreign currencies request lower margin levels. In other words, various foreign exchange transactions can be conducted on heavily leveraged accounts whose holders may start trading with low capital.

For example, if you deposit US$10 to the trading account and want to augment your trading power 1000 times, you will have US$10,000 to open a long (buy) or short (sell) position at all sizes. It does not matter provided you have winning streaks. Otherwise, several losing trades can exhaust your account balance. Unless you guarantee required margins, all positions, albeit profitable or unprofitable, are automatically closed.

  • Deregulation

Apart from no limits on leverage levels, the deregulated nature of the forex market enables attendees to open a position without stringent rules on lot size, selected currency pairs and trading hours.

What’s more, under the monitoring of no formal exchanges, traders may take a naked short position which empowers them to sell a currency pair with hopes for rebuying it later at a lower price although they show no ownership of the instrument. Such benefits can be turned into a nuisance if they magnify exposure to stakes and work on inappropriate tactics. Not to mention that various frauds try to fool naive traders, so partnering with regulated forex dealers is a must.

In remittance of services provided by brokers, some expenses are imposed. They consist of spreads which are differentials between the bid and ask price of a certain pair, commissions, overnight funding and other fees.

Foreign Bonds Funds

Instead of foreign direct investing, various casual investors prefer passive approaches to the forex industry, including working with mutual funds to purchase foreign government or municipal bonds. Some typical names comprise DFA 5-Year Global Fixed Income Fund, Templeton Global Bond Fund and Merk Hard Currency Fund. They help investors increase their interaction with a wider selection of debt securities from developed countries or some impressive emerging markets. In addition to the full capital obtained on the maturity date of those bonds, investors will monthly receive fixed interest rates as a stable source of income.

Those holdings may contain currency conversion risks. But some funds probably employ forward contracts that hedge against unexpected changes in price but charge some fees afterward.

ETFs or ETNs

Short for exchange-traded funds and exchange-traded notes in order, ETFs and ETNs are among the most prevalent ways to indirectly access the forex market even when traders have no or little knowledge of foreign currencies. Similar to mutual funds, ETFs representing investors use pooled capital and financial tools (e.g. futures contracts and swaps) to respectively purchase and administer a diverse currency portfolio. Nevertheless, this means traders should pay higher expenses when cooperating with those funds rather than trading on the traditional forex market.

ETFs can be classified into two groups: long ETFs that permit clients to hold currency pairs and sell later, and short ETFs that allow customers to sell or short instruments. Several currency ETFs include Invesco DB US Dollar Index Bullish Fund, Invesco CurrencyShares Euro Currency Trust and Invesco CurrencyShares Swiss Franc Trust.

Meanwhile, ETNs are more akin to a corporate bond than a collection of stocks, yet provide similar exposure to foreign currency transactions. You may consider such reputable ETNs as iPath Currency ETNs that involve Single Currency ETNs and Multi-Currency ETNs.

Regardless of which funds, they issue different policies on charges and other critical information. So, investors are more advised to read and grasp the relevant requirements of those funds before making any investment.

CDs or Savings Accounts

Many individuals believe that the safest way to invest in foreign currencies is through offshore deposits or certificates of deposit (CDs). It is not illegal to open an account with a domestic bank outside your host country as long as you comply with laws from both jurisdictions. Various people choose to finance foreign bank accounts for avoiding higher taxes imposed by their government, bolstering their financial privacy and protecting their assets from creditors.

In another scenario, investors can reserve foreign currencies in local banks. When a traditional savings account expires, foreign currencies will be converted back to their host currency. This is also the same as CDs. Seen as a kind of savings accounts, CDs are issued by banks and credit agencies with the intention of giving an interest rate premium to those who agree not to use their deposits over a predetermined period. Not many banks offer CDs, whilst such institutions as TIAA Bank provide a basket CD that is a combination of different currencies.

Multinational Corporations

One secure, yet an indirect way to step on the forex market is seeking domestic firms that extend their business activities to many corners of the globe and then investing in the stocks of multinational corporations.

Assuming you purchase some common securities of a London-based corporation that has various branches across the world. The appreciation of foreign currencies against the British pound indicates that more sterlings will be produced from more powerful currencies. This fosters the whole revenues of the company because those sales and net profits are often converted back to pounds in financial statements. Accordingly, its stocks are highly valued and bring in significant cash inflows if you decide to sell them, let alone dividends periodically paid for your ownership of those instruments.

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