The smart way to invest in currencies
If you follow the financial news, you may have noticed that there are constant movements in foreign exchange rates in the same way as there are movements in the Hang Seng Index. Although the scale of daily change rarely exceeds 1%, for some Hongkongers who invest in foreign currencies these seemingly insignificant ups and downs can make a significant difference to the value of their holdings. Investing in currency means attempting to profit from changes in the exchange rates. In other words, investors aim to earn the spread in exchange rates by buying low and selling high. Interest paid through the currency also constitutes part of the incomes. Since fluctuations in exchange rates are largely attributable to demand, investors usually focus on trading currencies with a large circulation, such as the Euro, Pound Sterling, Australian Dollar, New Zealand Dollar, US Dollar, Canadian Dollar, Swiss Franc and Japanese Yen.
How is currency investment different from stock investment?
Firstly, currencies are traded in more than 30 major markets all over the world. These markets span different time zones – when the market closes in New York, Sydney usher in a new day, followed by London and so on. The only downtime for major foreign exchange markets is from Saturday 5 am to Monday 6 am (Hong Kong time); outside of this period, the markets operate round-the-clock. Secondly, there are no restrictions against shorting currencies, and the "bear market" concept does not apply to foreign exchange investment. The simplicity of operation and the abundant liquidity in major currencies permit a large number of players to trade in the marketplace. Investors can buy and sell currencies in large blocks in accordance with their market views.
Foreign exchange investments entail lower transaction costs than stock investments because banks exempt management fees for currency accounts. On the other hand, In Margin FX Trading Services, the offering banks will usually profit from bid-ask spreads. For example, the related spread of HSBC can be as low as 0.012% with no commission fees.
Foreign exchange rate quotations can be categorised either as "direct quotation" or "indirect quotation". Direct quotations are priced in US Dollars. For example, if the price quoted for the US-Dollar-to-Canadian-Dollar is 1.0971, every 1 US Dollar can exchange for 1.0971 Can. If such quotation edges up, 1 US Dollar can exchange for a larger amount of Canadian Dollars, hence depreciation in the Canadian Dollars. Conversely, indirect quotations are priced in non-US Dollar currencies. Assuming the Australian-Dollar-to-US-Dollar exchange rate is 0.9275, an increase in this value represents an appreciation in the Australian Dollar.
Another key term in the world of currency investment is "point in percentage"(or "pips") – the unit for calculating profit and loss in foreign exchange, which is usually pointing to the fourth decimal places. For instance, if the Euro-to-US-Dollar exchange rate increases from 1.4022 to 1.4027, then the Euro has climbed 5 pips. The US-Dollar-to-Japanese-Yen quotation is a special case – the exchange rate is usually quoted to two decimal places, that is, if the quotation increased from 113.00 to 113.05, the Dollar-Yen would have gained 5 pips.
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