The trading of foreign currency is a financial activity that dates back to ancient times. Goldsmiths were tasked by imperial rulers to mint coins that could be traded for agricultural goods; they also became the first authorized money changers who could exchange coins minted by other empires.
Since gold was the raw material used to mint currency, the value of this precious metal was used to determine exchange rates for many centuries. The Bretton Woods agreement of 1944 effectively did away with the gold standard, thus starting a new era in currency trading as well as a the establishment of the financial exchange platform known as forex.
Individuals who wish to invest in foreign currencies should keep in mind that seeking to profit from exchange rates, which can fluctuate on an hour-by-hour basis; for this reason, it is important that prospective investors only allocate funds that they can afford to risk without compromising their personal or household expenses. With this in mind, here are a few options:
<strong>Holding Physical Currency</strong>
Banks and exchange houses located in metropolitan areas and tourism centers will buy and sell currency at market rates. An investor who believes that the British pound will recover from the rout it has suffered since the Brexit referendum of 2016 can buy and hold a few sterling notes and wait for the right time to sell them.
<strong>Becoming an Individual Forex Trader</strong>
The forex market is open 24 hours a day and six days a week; individuals can access this market by means of an online retail platform that allows them to trade currency pairs and profit from the spread. Forex traders can take long or short market positions, and they can also add certain features to suit their style of trading. Most individual traders cannot afford to trade standard lots of $100,000; for this reason, retail brokers offer margin trading at considerable leverage, which conveys greater risk to investors.
<strong>Forex Exchange Traded Funds</strong>
The risk and active participation of trading forex with retail brokers can be diminished with ETFs traded on Wall Street in a manner that is very similar to the stock market. Investors can choose between single currency, multiple currency, inverse, and leveraged ETFs. These instruments are designed to track international currency index products.
<strong>Foreign Currency Deposit Accounts</strong>
Some American banks allow clients to open money market accounts or certificates of deposit in foreign currencies. In the case of money market accounts, currency conversions at market rates are performed whenever funds are deposited or withdrawn. Foreign currency CDs are similar to ETFs in the sense that they track the performance of currency index products.
<strong>Foreign and International Bonds</strong>
All central banks offer sovereign bond notes in their national currencies; altough sales of these instruments are not normally offered to individuals unless they are physically present in the country of issuance, some investment banking firms and mutual funds make these foreign bonds and notes available to clients who agree to pay commissions and management fees.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!