Forex Trading is the subject of the following article. This informative piece is a very concise piece by blogger and online marketing consultant Agnese Geka:
With the uncertainty of modern times,
many people are realising that they need to take charge of their own financial
situation and ensure that they have adequate income for their current needs
(and wants) as well as preparing for the future. Forex trading can be an
excellent way of earning an additional income.
What is Forex Trading?
Forex is short for Foreign Exchange. Forex trading is the practice of buying
one currency (e.g. dollars) with another currency (e.g. pounds).
Most Forex trading is undertaken by companies to facilitate international trade
and to provide stability when managing their finances. A typical example of
this would be a company which wishes to import goods from Japan to sell in the
United States. By buying Japanese Yen in advance and paying in the local
currency, the US company knows exactly what the exchange rate will be. They can
then proceed to make future plans and projections without having the added
complication of potential exchange rate fluctuations.
Banks are also major participants in Forex trading. In addition to the fact
that their customers may want (or need) to make purchases in international
currencies (such as tourists buying souvenirs with their credit cards) and rely
on their bank to facilitate this, they also use the currency markets to make
additional profits for their shareholders. Finally, institutional investors
(such as hedge funds) and private investors trade in currencies in the
anticipation of making a profit.
How Does Forex Trading Actually Work?
Traders take loans in currencies linked to countries where interest rates are
low and use the money to finance loans in currencies linked to countries where
interest rates are high. The difference is the profit. The reason why Forex trading
is popular with people looking for a regular income is because interest is
calculated and settled at the end of each business day rather than every month
(or even every year) as with some other forms of investment.
The classic example of this has been buying Japanese Yen (where interest rates
have been held at zero for many years due to government policy) and using them
to finance loans in countries such as Australia where a strong economy fuelled
demand for credit and hence created higher interest rates.
Where is Forex Traded and How?
Unlike equities, Forex is traded 'over the counter' i.e. via computers
belonging to traders across the world rather than in specific exchanges. This
means that while specific equities can only be traded during the working day of
the exchange where they are registered, currency can be traded 24/7, five and a
half days a week.
Most trading on the Forex market is what is known as 'spot trading'. This means
that trades are based on the price at the actual time of the trade. There are
two other markets known as forwards and futures, both of which are essentially
agreements to make a trade at a future date. These markets are more complicated
and therefore more specialised.
Understanding Currency Quotes
A typical currency quote will look like this:JPY/AUD=123.456. The currency on
the left (in this case Yen) is the base currency and the currency on the right
(in this case Australian Dollars) is known as the counter currency. The number
after the equals sign shows how many units of the counter currency are equal to
one unit of the base currency. In short, 1 Japanese Yen will buy 123.456 Australian Dollars.
In reality, when trading on a currency exchange, currencies are likely to be
quoted like this:
This is shorthand for saying that the bid price (used when selling) is 123.456
and the ask price (used when buying) is 123.457. The first currency quoted is
always the currency in which the trade is being conducted. Hence, if a trader
wishes to sell Japanese Yen, they will receive 123.456 Australian Dollars for
every Yen they sell. If they wish to buy Japanese Yen, then they will have to
pay 123.457 Australian Dollars for every Yen they wish to buy.
What are the Risks of Forex Trading?
The big risk of Forex trading is that many Forex brokers allow their clients to
buy on leverage, i.e. using money loaned to them by the broker. This means that
traders can realise much greater profits when they make good trades, however
there is the potential for significant losses if a trader makes a mistake.
There are two ways to manage this risk. The first is simply to refrain from
using leverage and to trade on available funds only (as in the equities market)
and the second is to ensure that trades are placed with a 'stop loss' order
which does what the name implies and ensures that a position is sold if a
certain level of loss is reached. (Both of these strategies can be used
What are the Benefits of Forex Trading?
The main benefit of Forex trading is the liquidity of the market (as compared
with the trading process for other assets such as equities, bonds and
property). This liquidity means that intelligent traders can make regular
profits, leading to a reliable source of income. In addition to this, if the
currency itself increases in value, then traders can make substantial gains.
The key to using Forex trading to create a regular income is to understand that
it is an activity which requires attention. It is about making good decisions
time after time and reaping the rewards of dedication and perseverance.
Article submitted by Agnese Geka – a blogger and online
marketing consultant for www.SurveyCompare.net,
which is providing advice and latest updates on work from
home topic for anyone who is looking for extra income sources.
In the next couple of posts I want to take the time to discuss a number of different equity investments. As many of you know I am a big advocate of buying shares, especially when young. I don't see shares as a risky investment (controversial I know!) when looking to invest over the long run.
Ever wanted to invest in shares?
Investing in shares fits into the Multimillionaire Road Strategy in the following way: Aggressively save from your income and invest those savings into cash producing vehicles. The idea is to make your money work for you. Since shares produce a dividend (a portion of a companies profits), and also the opportunity for capital growth (increase in the value of an asset), shares appear a strong and relatively cheap investment vehicle i.e. you don't need lots of money to invest in shares, unlike when buying property or commodities.
I myself save just over 20% of my monthly income (around £390) and set it aside to use in investing opportunities. Here follows one such opportunity that I have taken:
A great minor share to invest
Lonmin Plc is a South African Platinum and other commodities miner. Roughly one year ago the stock was worth about 1100 pence per share. Today the share price sits at about 480 pence. The reason for the dramatic fall is due to the fact that there have been largescale strikes in the South African mining industry. This has caused companies like Lonmin to experience large reductions in production. For Lonmin this has resulted in a $680m loss, which has seen investors running for the hills.
I see myself as a bit of a contrarian investor. Much of the reason why people lose money on the stock market is because the tend to follow the crowd and get caught out when something adverse happens. As such, I like to stand against the tide, investing where others have run. This is partly why I am currently sitting on a 42% profit in Lloyds Banking Group Plc, achieved in less than a year, to use one example from my portfolio. I bought into Lonmin Plc at 516 pence about 2 weeks ago. The fact that it is currently making a loss is not a worry for me.This is a LONG TERM game! People will always want commodities. The fact that Lonmin had to agree to 20%-40% increases in wages will not affect their profitability in the long run. The wage increase is fairly negligible when you compare it to the potential revenue stream that could come out of it's mines.
Dividends and caveats when investing
Lonmin is looking to service some of its losses with a rights issue and once this occurs (which I am fairly certain it will)we shareholders can all look forward to some much needed capital gains. In the meantime I am very happy to sit on a respectable 2.23% dividend yield, especially given the fact that the rights issue will allow me to almost triple my holdings of the share for half the cost I originally bought them for.
Warning! This share is not for the feint-hearted. It will be volatile and a little unpredictable especially given the rights issue. However, I like the exposure to an emerging market and to the strong demand for commodities.
Readers, do you agree or disagree with my reasoning? How would you feel about this share? Do some investigation and let me know what you think?
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Always seek advice of a competent financial advisor with any questions you may have regarding a financial matter