Sep 27, 2011 11:44 AM (Originally publishing date)
Last weekend after attending our annual financial summit in Las Vegas I realized a couple of things.
1. Just about everyone wants to invest in currencies as a hedge and to add real diversification to their portfolios.
2. A very small percentage of the investing community really knows how to do it.
Precious metals and the currency are flying around the news just as much as the presidential election that is beginning to heat up. But unlike pulling a lever at election time, investing in the currency markets can be much more difficult and even dangerous if you don’t know what you are doing.
If you do know your way around the currency markets, you can tap into markets that have returned an average of over 75% during the past nine years.
In this article, I’ll show you a simple, cheap and stable technique to invest in currency. But let’s look at the mechanics first.
Pairs
The FX market is a “pairs” market. That means two currencies are paired up and their values are compared against each other. Generally when you want to “trade” a currency or speculate on its rise or fall, you will buy or sell a “pair.”
By using pairs, traders can get an exact value down to the thousandth of a penny! They can quickly profit or lose by very small changes in these values.
In fact, the word “pip” is a term used by many FX traders use. It is equal to 1/100th of a penny. Some traders consider a successful day making 50 pips. That’s one-half of a penny in profits!
The pair value itself trades like a stock; it can go up or down. It even has a bid and an asking price.
Here is an example of pair values
View larger chart
View larger chart
The first currency in the pair is the divisor. The second is the dividend and the last price is the quotient. The value you see on your screen is how many U.S. dollars (USD) it would take to buy the paired currency.
So if you look at the USD/Canadian dollar (CAD), it takes $1.03 USD to buy a CAD. The first currency is one that you are buying or selling, so if you thought the USD was going to rise against the CAD, you would buy this pair. Vice versa if you thought it was going to fall.
Currency prices can move extremely fast and leverage is extreme, which can be overwhelming for many folks who try their hand at this fast trading method.
It’s certainly not for someone who can’t be at their computer frequently.
The advantage here is that is doesn’t take much money to get started. Account minimums are usually around $1,000.
Hopefully you drink caffeine, because these markets are open 24 hours a day, seven days a week…
Until recently, the FX market was primarily used by large companies and banks to protect themselves from currency fluctuations.
For example…
If “ABC” beverage company sells most of its goods in Europe, but is U.S. based and reports earnings in U.S. dollars, its revenues will be strong when the U.S. dollar is weak and the euro is strong.
It’s kind of like being able to sell your $1.00 U.S. Coke for $1.50 in Europe. But what if the tables were turned and you were selling most of your $1.00 U.S. Cokes for $0.75 in Europe? Do you think ABC company would be making as much money? No.
So to protect themselves, they would buy U.S. dollars/euro pairs to protect against such a shift.
Individual investors can buy or sell currency pairs to speculate on small price movements, but this takes skill and patience, and there is a steep learning curve involved.
Paper Currency
For those of you who don’t want to count pips or buy cases of Red Bull to stay up late, you can simply accumulate dollars in the currencies that you want to own. This is the most efficient and straightforward means of investing in an actual currency.
Just like opening up a bank account in America, some investors will physically open accounts denominated in foreign currency.
This was easier said than done for a long time. For many countries, you will need to travel there and physically open the account. There were also restrictions and reporting requirements that made this a daunting task.
EverBank, which has been in business since 1961, has torn down many of the barriers to entry that once faced investors wanting to simply open accounts in foreign currency. Now, you simply open an account with EverBank in just about any currency you want.
A couple of years ago, we decided to take paper currency investments a step further. Being that there are dozens of currencies out there to invest in, it could cost you a bundle not to mention a ton of energy to research the best ones. To help make the currency markets more accessible to the average investor, Taipan (now Insiders Strategy Group) partnered with EverBank to create the “Ultra Resource CD.”
Basically, this CD allows you to earn interest on dollars that are divided among several foreign currencies including the Australian, Canadian, Hong Kong, New Zealand and Singapore dollar and the Norwegian krone. The best part is that your money is FDIC insured.
You will earn interest and have the potential to profit from movements in these currencies. It is a way for the average investor to diversify with currency without having to fiddle with all of the nuances of the currency markets. It is also OK in an IRA and has averaged almost 7% returns for the past 10 years.
It wouldn’t hurt for you to read a bit more about it; you can find more details here. If you are interested in opening an account, click here.
There are many ways you can take advantage of the FX markets; a hedged, prepackaged CD that is already diversified may make the most sense for many investors. With the recent dollar rally, it may be good time to look at buying a product like this.
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