Foreign Exchange and Currency Trading
Most people only take a real interest in foreign exchange (forex or FX) when they want to travel abroad. Forex information is important to anyone who has an investment in a foreign country or who is thinking about making an offshore investment. Forex rates are commonly grouped with other financial indicators when they are reported in the media.
The Forex Market
The reason forex markets exist is to exchange one currency into another. Forex trading is the largest financial market in the world. Internet facilities have largely contributed to the popularisation of currency trading. Multi-national corporations and governments use forex when they purchase services or goods from another country. However, this only constitutes 20% of the all forex trade. The remaining 80% is done by investors for speculative purposes.
Forex is not traded in the same way as stocks, futures or options on a regulated exchange. Any trade of one currency for another is based on a credit agreement. As such, forex deals are subject to far fewer restrictions. Consulting a StoneHouse Capital Partner can provide further information which can help investors to avoid the pitfalls of forex investment.
Forex trades are made in currency pairs. The most commonly traded currency pairs are referred to as €the four majors€:
€ EUR/USD (Euro/Dollar)
€ USD/JPY (Dollar/Japanese Yen)
€ GBP/USD (British Pound/Dollar)
€ USD/CHF (Dollar/Swiss Franc)
All the major financial centres of New York, London, Frankfurt, Paris, Zrich, Singapore, Hong Kong, Tokyo, and Sydney trade in forex. The forex market is open 24 hours a day, five days a week.
Ways of Making a Profit on Forex
No two currencies move perfectly in step with each other. Currencies fluctuate for political, economic, social and psychological reasons. These are related to the internal state of a country using a particular currency. These conditions can be exploited for profit.
Central Bank Interest Rates
Differences in central bank interest rates between two countries account for some of the profits, e.g. Canada has a low Central Bank interest rate of 1%, while in South Africa the interest rate is significantly higher at 5%. An investor uses 100m Canadian Dollars (CAD) to buy South African Rand (ZAR). He can leave it in South Africa until it is worth 105m CAD. Had he kept his investment in CAD for the same length of time, it would only be worth 101m CAD. Other things remaining equal, the investor therefore made a profit of 4m CAD.
Currency Exchange Rates
One can also buy forex with the hope that the currency you are buying will get stronger. If you have grounds to believe that the USD will weaken against the EUR, you can sell your Dollars and buy Euros before this happens. Once the Euro has strengthened you can buy back more Dollars than the initial amount you used to buy the Euros.
The Regulation of Foreign Currency Trading
Even though there are very few restrictions on forex deals, most countries have some regulations in place to promote or enforce ethical currency trading. These laws most often apply to financial service intermediaries, which include forex traders and people who advise clients on currency trading. This usually involves registration of any forex trader with an accredited organisation which has a set of rules governing forex trades, for example:
o USA - The National Futures Association (NFA) 1: Registration of a Retail Foreign Exchange Dealer (RFED) with the NFA is required under the Commodity Exchange Act. Forex trades are governed by the final regulations concerning off-exchange retail foreign currency transactions (Fed. Reg. 55410)2.
o UK - The Financial Conduct Authority (FCA): Although forex trade seems less regulated in the UK than in the USA, the FCA makes some provision for forex trade in their manual. 3
o South Africa - The Financial Services Board (FSB) 4: Forex brokers are required to register with the FSB in terms of the Financial Advisory and Intermediary Services (FAIS) Act, 2002. Their actions are covered by a code of conduct. 5
The foreign currency trade may seem like a simple and speedy way of gaining high returns on investments. It may appear to be easy to make a profit simply because forex markets are very accessible. Yet it is an area fraught with high risk to the investor. Consulting the Partners at StoneHouse Capital can help any investor to see how forex investment can fit in with one's investment strategy.
References
1. National Futures Association (NFA) (2013) Retail Foreign Exchange Dealer (RFED)
2. U.S. Commodity Futures Trading Commission (10 Sep 2010) Foreign Currency Trading
3. Financial Conduct Authority (FCA) (Revised 1 April 2013) CASS 5 Annex 1 Segregation of designated investments: permitted investments, general principles and conditions (Annex belonging to CASS 5.5.14 R)
4. Financial Services Board (FSB) (18 March 2004) Forex brokers to register with FSB
5. REPUBLIC OF SOUTH AFRICA (30 March 2004) FINANCIAL ADVISORY AND INTERMEDIARY SERVICES ACT, 2002 (ACT NO. 37 OF 2002) CODE OF CONDUCT FOR AUTHORISED FINANCIAL SERVICES PROVIDERS, AND THEIR REPRESENTATIVES, INVOLVED IN FOREX INVESTMENT BUSINESS, 2004 IN Board Notice 39, Government Gazette No. 26201 OF 2004
Most people only take a real interest in foreign exchange (forex or FX) when they want to travel abroad. Forex information is important to anyone who has an investment in a foreign country or who is thinking about making an offshore investment. Forex rates are commonly grouped with other financial indicators when they are reported in the media.
The Forex Market
The reason forex markets exist is to exchange one currency into another. Forex trading is the largest financial market in the world. Internet facilities have largely contributed to the popularisation of currency trading. Multi-national corporations and governments use forex when they purchase services or goods from another country. However, this only constitutes 20% of the all forex trade. The remaining 80% is done by investors for speculative purposes.
Forex is not traded in the same way as stocks, futures or options on a regulated exchange. Any trade of one currency for another is based on a credit agreement. As such, forex deals are subject to far fewer restrictions. Consulting a StoneHouse Capital Partner can provide further information which can help investors to avoid the pitfalls of forex investment.
Forex trades are made in currency pairs. The most commonly traded currency pairs are referred to as €the four majors€:
€ EUR/USD (Euro/Dollar)
€ USD/JPY (Dollar/Japanese Yen)
€ GBP/USD (British Pound/Dollar)
€ USD/CHF (Dollar/Swiss Franc)
All the major financial centres of New York, London, Frankfurt, Paris, Zrich, Singapore, Hong Kong, Tokyo, and Sydney trade in forex. The forex market is open 24 hours a day, five days a week.
Ways of Making a Profit on Forex
No two currencies move perfectly in step with each other. Currencies fluctuate for political, economic, social and psychological reasons. These are related to the internal state of a country using a particular currency. These conditions can be exploited for profit.
Central Bank Interest Rates
Differences in central bank interest rates between two countries account for some of the profits, e.g. Canada has a low Central Bank interest rate of 1%, while in South Africa the interest rate is significantly higher at 5%. An investor uses 100m Canadian Dollars (CAD) to buy South African Rand (ZAR). He can leave it in South Africa until it is worth 105m CAD. Had he kept his investment in CAD for the same length of time, it would only be worth 101m CAD. Other things remaining equal, the investor therefore made a profit of 4m CAD.
Currency Exchange Rates
One can also buy forex with the hope that the currency you are buying will get stronger. If you have grounds to believe that the USD will weaken against the EUR, you can sell your Dollars and buy Euros before this happens. Once the Euro has strengthened you can buy back more Dollars than the initial amount you used to buy the Euros.
The Regulation of Foreign Currency Trading
Even though there are very few restrictions on forex deals, most countries have some regulations in place to promote or enforce ethical currency trading. These laws most often apply to financial service intermediaries, which include forex traders and people who advise clients on currency trading. This usually involves registration of any forex trader with an accredited organisation which has a set of rules governing forex trades, for example:
o USA - The National Futures Association (NFA) 1: Registration of a Retail Foreign Exchange Dealer (RFED) with the NFA is required under the Commodity Exchange Act. Forex trades are governed by the final regulations concerning off-exchange retail foreign currency transactions (Fed. Reg. 55410)2.
o UK - The Financial Conduct Authority (FCA): Although forex trade seems less regulated in the UK than in the USA, the FCA makes some provision for forex trade in their manual. 3
o South Africa - The Financial Services Board (FSB) 4: Forex brokers are required to register with the FSB in terms of the Financial Advisory and Intermediary Services (FAIS) Act, 2002. Their actions are covered by a code of conduct. 5
The foreign currency trade may seem like a simple and speedy way of gaining high returns on investments. It may appear to be easy to make a profit simply because forex markets are very accessible. Yet it is an area fraught with high risk to the investor. Consulting the Partners at StoneHouse Capital can help any investor to see how forex investment can fit in with one's investment strategy.
References
1. National Futures Association (NFA) (2013) Retail Foreign Exchange Dealer (RFED)
2. U.S. Commodity Futures Trading Commission (10 Sep 2010) Foreign Currency Trading
3. Financial Conduct Authority (FCA) (Revised 1 April 2013) CASS 5 Annex 1 Segregation of designated investments: permitted investments, general principles and conditions (Annex belonging to CASS 5.5.14 R)
4. Financial Services Board (FSB) (18 March 2004) Forex brokers to register with FSB
5. REPUBLIC OF SOUTH AFRICA (30 March 2004) FINANCIAL ADVISORY AND INTERMEDIARY SERVICES ACT, 2002 (ACT NO. 37 OF 2002) CODE OF CONDUCT FOR AUTHORISED FINANCIAL SERVICES PROVIDERS, AND THEIR REPRESENTATIVES, INVOLVED IN FOREX INVESTMENT BUSINESS, 2004 IN Board Notice 39, Government Gazette No. 26201 OF 2004