By Charis Mountis, Head of Dealing, ForexTime
Much is written about forex being a new investment tool, but the reality is that nothing could be further from the truth. The retail forex trading sector has been growing and developing for the better part of 20 years and is now coming into its own as a fully-fledged asset class and important component of the diversified portfolio for a new financial era. During this time, the platforms, tools and brokers available for trading currencies have grown in both size and sophistication, allowing retail investors, small brokerages and international financial institutions a level competitive playing field. So, the only conclusion is that it would be inaccurate to still characterise the FX industry as being in its infancy.
While retail forex still suffers from the stigma of its relatively fresh arrival on the investment scene, the eyes of a growing number of investors around the world are setting their sights on FX. These investors understand that in the changing financial and investment landscape, it possesses many qualities that are preferable to that of traditional investment vehicles such as stocks, bonds and derivatives.
In the past few years, the trust in banks and established financial products has fallen to an all-time low; consequently, the interest in retail forex trading has risen rapidly. The economic events of the last decade have caused investors to become further interested in learning more about what other financial instruments can be utilised to transform their investments into profits.
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Specific interest in forex as an alternative investment class has strengthened due to the combination of flexibility, independence and accessibility that it provides in comparison with traditional investment pathways.
The Rise of Independent Investing
The number one attraction for investors to trading forex is the elimination of the middleman. Retail forex gives investors the flexibility to take control of their own financial destiny without the need for a bank or a financial advisor. Banks took a huge hit in the global financial crisis and their reputations are not going to be restored in the short term – forex trading has filled a number of these gaps where investors are looking to regain some of their losses from the banking collapse.
This is a particularly prominent selling point for the experienced and competent investors, who can take control of their trades, choosing when and what to trade. And without the hassle and risk of a middleman in between the investor and the market, trading forex means investors aren’t required to pay heavy fees or commissions for each investment.
In comparison, the centralisation of stock trading means the timing of trades is restricted to whenever that particular exchange is open and you usually have to go through either a bank or a broker to get access to the stock market. While stock exchanges are usually open for eight hours a day, the process of buying and selling stocks is burdened by administration, making it a slow process at times. In the world of forex, the market is open for trading 24 hours a day from the opening in Sydney on Monday morning local time to the market close in New York on Friday evening local time. That means that at any moment during these hours, you can manage your investments with just a click of a button.
This doesn’t mean, however, that forex traders need to become insomniacs from market opening to closing; forex traders can be flexible in when they choose to trade and are able to schedule trading around the responsibilities of their personal lives while still taking advantage of market volatility. This flexibility is not only tied to time, but also geography. The decentralised nature of the forex market means that investors are not geographically tied down to investing in any one particular region or to a major financial centre.
The Most Liquid Market in the World
Another feature of the foreign exchange market that has caught the attention of retail investors is liquidity. With more than $5 trillion traded on the international currency market each day, forex is the largest and most liquid market in the world. Lack of liquidity was part of the downfall of the banks during the financial crisis; so many investors lost large portions of their portfolio due to it being tied up in too many long-term investments. Diversifying into a market with a high capacity for cash flow is important for preventing this type of loss, as history tells us that the cycle will come around once again and there will be another downturn at some point in the future.
Not only is liquidity important, but the stock market is more often than not seen as a long term investment and with some stocks you need to wait months or years in order to see your initial capital provide return. But forex is ideal for day traders or investors looking for shorter term opportunities. The sheer volume of liquidity in the forex market means that there is always an opportunity for return, regardless of which way the market is moving.
The forex market also allows for speculating on the market in both directions; whereas in stocks trading you can only speculate on the market strengthening, with short trading predominantly banned in most regions.
Boost Returns with Leverage
Forex traders also famously benefit from being able to use leverage to hold bigger positions in the market. Leverage in forex trading is a double-edged sword; by using borrowed money to boost returns it can magnify returns but also losses. However, used carefully under comprehensive risk management strategy, leverage can be a valuable forex tool that can transform an investor’s bottom line.
Just as with any investments, there is a risk of loss when trading forex and all investors are strongly encouraged to do their due diligence before engaging in the currency market. However, as more people than ever look to take control of their personal investments, forex trading is only going to grow further in popularity. Already being so well-known and utilised by serious investors, it won’t be long before it is recognised as a fully-fledged alternative to traditional investments.
Disclaimer:The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime Ltd, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same.
Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.