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Poor Man’s Access To Foreign Currency Trading
By: Francis Kier
By far, the largest trading market in the world is the foreign currency market.
Speculators make up only a small part of the spot (cash market) and forward
(futures market) currency exchange transactions. So if you are considering
speculating in this area, be aware that you are trying to out-guess the
brightest minds & supercomputers at large banks and hedge funds; along with the
political whims & expediency of government treasury departments.
The common portfolio use for holding foreign currencies is to hedge against the
fall of your home currency. For most people, their salary and all their assets
are based in their home currency – and if that falls in value, so does their
entire net worth and future earnings. For Americans, as an example, there has
been a growing trade deficit with China for many years. And if China were to
allow their currency to fluctuate, the U.S. dollar would fall against the
Chinese yuan in concert with this trade deficit.
You can also include currency trading as an additional way to diversify your
portfolio. I have read many, many books to learn about currency trading, and
even day-traded the Swiss-Franc for six months. If you want to learn how to
speculate with trading currencies, you can either try some technical analysis
services (www.currencyprofits.net), or getting a Phd. in economics and finance,
but I can’t guarantee that will increase your odds of success.
I made my only ‘very poor man’ currency trade prior to the establishment of the
Euro currency in 2002. While driving in my car, I heard a speech over the radio
by the German president that I felt was certain to cause a short-term fall in
the German Mark. I drove to the nearest AAA Travel Office, and went to the ATM
next door to withdraw $200 in cash to put in my pocket. Being a AAA member, I
then exchanged the $200 for American Express Traveler’s Cheques that were
denominated in German Marks. Four months later, the U.S. dollar had increased by
10% on the German Mark. So I took my German Mark cheques to exchange them back
into dollars and cash out with a giant profit. To my disappointment, the fees
for the buy & sell transactions added up to about 8%, leaving me with a giant $4
profit. So if you want to try the “Travelers Cheque” route, you’ll need a big
trend to offset your transaction fees.
The next step up in initial cost is an ETF that is based on the Euro with the
ticker symbol FXE. It is technically a trust, but it is traded exactly like a
stock, and it fluctuates very close to the USD/Euro rate. When you think the
dollar is going to fall against the Euro, just buy some of these shares to
offset your currency risk, and you can start with one share for less than $200.
The next way to get access to foreign currencies is to get some FDIC insured
certificates of deposit from Everbank.com. They offer CDs in over 10 different
foreign currencies and a couple indices, and the minimum investment is only
$10,000 for an interest earning account. So if you are tired of your bank’s low
savings account rate, there are currencies that regularly offer a higher yield
without undue currency exchange risk.
Risk a few small steps into foreign currency investments, and anything
dollar-based will feel disappointingly tame. Plus, you’ll have bragging rights
with your friends and dinner parties on your sophisticated investment portfolio.
About the Author:
Francis Kier has an MBA in finance and shares his two decades of experience with
investing and personal finance. More of his articles are available at http://investing.real-solution-center.com.
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