What are Foreign Exchange Investments?

Investing is often considered the best way to build wealth over long periods of time. While savings accounts can yield modest, guaranteed returns, savers often accept greater risk by purchasing stocks, mutual funds and real estate to earn larger returns. Foreign exchange investments involve selling and buying foreign currencies to make a profit.

Forex Basics

Investing is the buying of an asset in the hopes that it's going to increase in value so that you can sell it at a later date at a profit. forex investors purchase currencies they think will increase in value relative to other world currencies then they're buying back the original currency to generate a profit. For example, if a European investor buys U.S. dollars at a rate of $1.30 per euro and exchange rates change to $1.20 per euro later on, he could exchange his U.S. dollars back to euros to earn a profit.

Benefits

Forex trading offers a few notable benefits. According to the U.S. Securities and Exchange Commission (SEC), the currency market is the world's largest financial market, with an average daily trading turnover of around $1.5 trillion. Forex markets operate during all hours of the day, and trades can be done electronically and over the phone. Unlike real estate investment and certain stocks, foreign currencies are extremely liquid assets, meaning they're easy to buy and sell anytime. Learn more about our forex strategies and reviews on our forex blog.

Drawbacks

Forex investing has several potential drawbacks. Banks and other financial institutions that sell foreign currency or trade currency on behalf of investors may charge fees or build markups to their exchange rates, which could reduce profits and increase losses. The values of currencies can go up and down unexpectedly, meaning investors can easily generate losses.

Considerations

Forex investing can lead to rapid investment gains and losses. The currency market is also known to be susceptible to scams. The SEC states that websites may advertise excellent or guaranteed returns in the forex markets to defraud unwitting investors of money. The United States Commodity Futures Trading Commission (CFTC) recommends that consumers avoid any investments that promise large profits with little risk. Detailed research of all opportunities is vital. That is the nature of investing, you win some, you lose some. But if you choose out the right forex trading system, chances are high that you'll be successful.