Foreign exchange, or forex, is the largest financial market in the world. About $5.1 trillion (₹376 trillion) is traded daily in the forex market compared to the stock market, which only moves an estimated $84 billion (₹6.1 trillion) in daily volume. India’s forex reserves reached $541.431 billion (₹39 trillion) in August, an all-time high that puts the country in a strong position even amidst the coronavirus pandemic.
With that said, investors in India may be interested in participating in the forex market. Forex trading can be a profitable investment but it is also overwhelming to novice investors and traders.
If you are a novice, this article is for you. You will learn the outline of how to get started in forex trading as well as the pros and cons that every investor should know.
The most direct way of investing in forex is through trading. Forex trading simply means buying or selling one currency in exchange of another, that’s why they always come in pairs. They are represented by an ISO currency code that distinguishes them from other currencies in the international market.
For example, INR/USD represents the Indian Rupee and the US Dollar. In this pairing, INR is the base currency — the one you are buying at a specific exchange rate— and USD is the quote currency — the one that you are selling.
The concept of profiting from forex trading is actually quite straightforward. You invest in a currency that you think is going to appreciate in value and you sell a currency that you think is going to depreciate in value.
Note that, you can trade any currency outside of your own which makes it an accessible form of investment. If, for example, you own GBP and think will depreciate, you can sell it while the price is still high. If you buy back that GBP when the value is lower, you will have made a profit from the price change.
Rewards and Risks
Starting a forex trading account is easy enough — all you need is to open an account on a reputable trading platform. Then, you will have to transfer funds before you officially start trading currencies. But before you do, you must understand the rewards and risks of forex trading.
The forex market is open 24 hours a day, which means you can trade virtually anytime and anywhere. The required minimum capital to open an account and start trading is also low, making it accessible to investors who are just starting to build their portfolio.
#2. Lower costs
Compared to equities, the costs of trading forex are much lower. Generally, trading platforms and forex brokers charge a small percentage of profits you generate per trade, instead of a specific fee regardless of your profits. Taxes are also more amenable and easier to calculate compared to other investments.
Trading forex comes with a huge potential for profit even if you have limited funds. In FXCM’s guide to forex trading they explain that this is because of leverage which is essentially borrowed funds from a broker. This provides you with more exposure and a greater opportunity to multiply your funds.
The forex market is a fast-paced environment which means that it is also highly volatile. There are many factors that can influence exchange rates, and these include a country’s political stability, debt, terms of trade, and economic performance. For example, the Indian rupee fell to a record low in 2018 as it faced inflation due to high oil prices. When trading currency pairs, it is very important to keep updated with these factors to more accurately predict how prices will move.
#2. Lighter regulation
Because forex operates over-the-counter, it is also subject to lighter regulatory protection. It is up to traders to look for reputable brokers and trading platforms to protect their investment.
Notice how leverage falls under the rewards and risks category. That’s because increasing market exposure also magnifies the potential to lose investment capital that you might not have in the first place. One of the golden rules of money management in forex trading is to avoid trading with excessive leverage.
Forex trading can be very profitable even for new investors and traders. While there are some considerable risks, such as high volatility, the payoff potential is huge in trading currencies. Reliable trading platforms are also very easy to navigate and even offer training that can help maximize your trading success.
If you’re still unsure about forex, read ’11 Best investment Options For Salaried Person in India 2020’ for more ideas on building your personal wealth.