These investments can be extremely attractive…
The foreign exchange market is the biggest, most dynamic and most liquid capital market in the world. Also known as the forex market, the average daily turnover is around US$4 trillion a day which is about 20 times bigger than the daily turnover of the New York Stock Exchange. In fact the daily volume is currently 6-8 times the daily turnover of all the sharemarkets around the world combined. In the forex market you can buy and sell one nations currency for another such as buying the New Zealand dollar versus the United States dollar. The foreign exchange market is simply a free market of all the world’s currency’s on a floating exchange rate therefore it is not centralised such as the much smaller sharemarkets around the world. Transactions are interbank and over the counter.
The Forex market although dominated by all types of banks whether it be commercial banks, investment banks and contral banks, along large multi national companies simply needing to do business with another country has become open with technology. The market is growing with , global money managers, registered dealers, international money brokers, futures and options traders, and private speculators.
The forex market is a 24 hour market and starts each week on Monday at 10am/11am New Zealand time depending upon daylight savings and does not close until Saturday 9am/10am/11am depending upon daylight savings both here and in New York. The foreign exchange market opens in Sydney on Monday morning when liquidity is usually light and then picks up when Tokyo opens. After which Europe and London comes online when liquidity usually peaks although the London/New York crossover can see huge liquidity also. Because it is a 24 hour market investors can take action to moves in the currency market caused by economic, political and social events as they occur in real time. This is unlike other financial markets where you have to be somewhat reactive, in the foreign exchange market you can be proactive.
The main currencies that are traded in this order are the US Dollar, the Euro, the Japanese Yen and the British pound. Althought the Swiss Franc is considered a major also, In recent times we have seen the trading volume of the Australian Dollar catch up to that of the Swiss Franc and overtake that of the Canadian Dollar. The trading volume of the New Zealand Dollar will always be light although it it is still a favourite amongst banks for its interest rate differential. All these currencies are highly liquid as they are the currencies of countries that are considered to have a very stable government, central banks with a high international credit rating and countries where inflation is relatively low compared to that of rapidly developing countries.
The Forex market is as close to a perfect market as you can get. One key distinction you want to know is that, the currency market has never experienced a bear market that can be seen in all other asset classes such as we have seen over and over again in the sharemarket around the world or in the real estate market. There is no boom or bust in the forex market so therefore investing in forex really is as crash proof as you can get. The foreign exchange market offers excellent diversification. Professional, experienced traders will usually be able to find one currency that will probably strengthen versus another either over the short term or the long term. There are always trends in forex and it is just a questions of knowing what to do, in order to be profitable.
The foreign exchange market has no central exchange and no physical location which is quite different from other financial markets. It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centres. In essence, it is a truly global market, which operates around-the-clock and around-the-globe. The global nature of the Forex market, utilizing modern information technologies and financial services, enables private investors to participate in the market from their homes or offices now via telephone or computer with an internet connection.
Traditionally, retail investors’ only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets.
The Forex market is quite different than a market such as the stock market. As a result of its global dimension, the Forex market is open 24 hours a day, which enables investors to correct their positions at any point in time. Given the large number of players, the Forex market has narrow spreads and virtually no price gaps. The lack of price gaps typically enables investors to count on non-slippage order execution. However, in a very volatile market the possibility for slippage does still exists.
The large volume of participants also reduces opportunity for insider information. To put it simply, there has never been a case of complete non-recoverable currency collapse in a developed country. The volatility of leading currencies rarely exceeds 1% per day, in contrast to the volatility of shares, which may fluctuate by up to 10% over one trading session. The Forex market generally provides more opportunities for leveraged trading (although it should be noted that a higher leverage size is associated with higher risks).
<h2>What are forex investments, and why would I add these to my portfolio?</h2>
Characteristically speaking, a forex investment is a non-traditional investment. Traditional investments include real estate, shares and bonds. Although forex investments are considered by some as riskier investments than traditional investments we believe when properly structured, these investments can be extremely attractive.One of the largest advantages of forex investments is in their ability to profit in virtually any economic environment.
Time after time, the successful growth of this investment class thrives regardless of conditions such as a strong economy, low inflation, high interest rates, or a depressed sharemarket. The success of forex investments typically depends on performance, as well as the risk and diversification used. Investors adding this asset class to their portfolio can help reduce volatility, minimize risk, and possibly increase the risk versus return ratio of their overall portfolio.
Because of this, it is no surprise that foreign exchange investments have increased dramatically in popularity over the past 10 years as investors search for alternatives to traditional markets. It is more common now to see these types of investments used in typical portfolio management strategies.