Investing In Forex

Published on March 3, 2014

By iMoney Editorial

Foreign exchange (Forex) trading has long been an uncertainty for most due to lack of awareness and education.

Some wonder if trading in Forex is even legal in Malaysia. According to Bank Negara Malaysia, the act of buying or borrowing foreign currencies from or selling or lending currencies to an unauthorised dealer is illegal.

Unauthorised dealers refer to an individual/company that has not obtained the permission of the Controller of Foreign Exchange under the Exchange Control Act 1953 (ECA) to trade in Forex in Malaysia.

Due to the numerous negative reviews and uncertainties, most people just choose to steer clear of investing in Forex. While not a commonly sought after choice of investment, there are benefits to investing in Forex – and with that, risks.

Investing in foreign exchange currencies means to buy, sell, exchange and speculate on currencies. To that end, investors can dabble in Forex trading via:

The Forex market: A 24-hour cash market where currencies are traded in pairs (e.g. Euro/US dollar). Essentially, investors are betting that one currency will go up and the other will go down. These currencies are bought and sold at current exchange rate.
Foreign currency futures: Currency contracts that are bought and sold at standard size and settlement date. Holder of a currency future is obligated to buy or sell the agreed upon amount of foreign currency regardless of whether he or she makes a gain or loss.
Foreign currency options: A right to buy or sell a pre-specified amount of foreign currency at a previously agreed upon price on or before a specified date in the future. Holder of an option is given a choice not to buy or sell.
Exchange-traded fund (ETF): An open-ended investment fund listed and traded on a stock exchange such as Bursa Malaysia. An ETF is comprised of various individual securities, allowing investors to invest in many individual companies in on transaction.
Certificates of Deposit (CD): Similar to fixed deposits, foreign currency CDs has a fixed placement date (i.e. holders of CDs cannot withdraw funds on demand) and a specified interest rate. CDs are available in a single currency or a basket of multiple currencies.
Foreign bond funds: A mutual fund that invest in bonds of foreign governments.

As listed above, there are a number of ways in which one can invest in foreign currency. While each has its own benefits and risks that make one option more attractive than the other, there are upsides and downsides to investing in Forex in general.

Advantages

One of the benefits of Forex trading lies in the fact that currency prices are based on the objective considerations of supply and demand and cannot be easily manipulated. Not even large players, such as central banks can easily move prices at will making it sort of an even playing ground.

Every seasoned investor knows that they should not put all of their eggs in one basket. Investing in Forex lets them do just that as it allows diversification, thereby mitigating potential risks by offsetting losses from investment in one currency with gains from another.

Disadvantages

For all its advantages, forex trading can be particularly risky as the foreign exchange market is known for moving in very small increments – as small as 1% per day. It is due to this reason that for investors to make their investments worthwhile, they would have to buy a larger quantity of a particular currency thereby multiplying their gains.

In most cases, investors would have to borrow money in order to do so, believing that the gains from Forex investment would be more than enough to cover the cost of borrowing. This exposes them to the risk of financial loss and even bankruptcy if their investment in foreign currency turns a loss.

Takeaway for potential investors

Trading in foreign currency can pave the way to achieving financial goals but Forex trading is also one that requires – at the very least – a basic understanding behind currency fluctuations.