Passive Income Series – Forex Trading – A New Investment Option

Diversify your portfolio. Don’t put all your eggs in one basket. How many times have you heard these statements? While these statements can apply to more to just finances, the chances are that you understand that it is a bad idea to invest all your cash in one stock, or put all your money into the same property - but have you really thought about a long term strategy?

Current bank interest rates can only be described as shocking. I read an article at work today that discussed how an Aberdeen Assets fund manager has stated that the safest place for savers to put their money is in shares. While this might seem like an outrageous statement to most, he makes a good point; investing money in a savings account is a pretty bad idea. Given the current rates of inflation versus the interest rates… you are guaranteed to lose money.

In previous posts of this series we have discussed:

Method 1 – Get Paid to Browse the Internet

Method 2 – Income from Investing

 

What is Forex Trading?

Forex Trading is something we have all probably heard about at some point – perhaps through an advert in the Financial Times or a money magazine of some sort; but do you actually know what it means? Forex trading is the trading of foreign currency (hence the name foreign exchange). Essentially, you buy one currency with another – the idea being using the fluctuating currency conversion rates to your advantage.

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Success Story – The Accidental Pay Day

I have a great personal example of how you can make some serious money on the Forex markets. My uncle and his family live in the US after he emigrated over 20 years ago. After leaving the UK, he sold his property and left a large sum of money in a UK bank account. He owns a project management type business and a few years back had to transfer a large sum of money as collateral for an insurance bond – essentially he had to use the nest egg as a guarantee against the insurance policy for a job. He transferred the money from GBP (British Pounds Sterling) to USD (US Dollar) at a rate of approximately $2 for every £1. £80,000 of savings became equivalent to $160,000.

Now he kept this money in the bond to guarantee the insurance for about nine months and transferred the cash back to his UK account shortly after. He thought nothing of this for about a year, until he received his annual interest statement for the UK bank account. Can you imagine the shock (and delight) upon finding out that £80,000 was now over £100,000!? Now I can assure you that the bank didn’t decide to pay him 25% interest, but instead the foreign exchange markets had changed significantly: £1 to $2 had become £1 to $1.50. A case of trading the money at the right time – Had it been the other way around, he would have made a significant loss!

 

Who is Forex Trading For?

The simple answer is everyone! Anyone is able to trade in foreign exchange, but those who have interests and investments in multiple countries had a slight advantage as they can trade between bank accounts. For example, if I have investments in the US (or at least in dollars) and in the UK, I could benefit from having assets in both currencies and move funds when the markets are advantageous to your positions, but there can be significant fees associated with this technique. Others will use Forex trading platforms to convert money between different currencies with the intent purely to make money – i.e. there is no practical reason (like to invest in a property) for converting from one currency to the other.

 

Like anything else, Forex Trading has a level of risk associated with it. There are many resources online where you can learn about the principles of Forex and trading within the market. I highly recommend that you do some reading and research before jumping in – You can lose money as well as gain through trading currencies. That said, if you are totally risk adverse, maybe the low-interest savings accounts are a better option. You have to be prepared to lose some (if not all) of your investment or play. Similar to the stocks and shares, some currencies are more stable than others – politically unstable currencies are far more likely to fluctuate than the US dollar.

 

Have any of you guys traded currency? Good or Bad stories? Did you make a profit?

 

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Comments

  1. I have been trading for a few years, and it has been quite positive. The leverage wouldn’t let me sleep at night, either because of the fear of losing or the excitement of winning, now I almost don’t use leverage but have an hedge for different currency needs and like trading.

  2. I haven’t done any trading but I have lost money from my own stupidity. When I moved to Canada the pound was worth $2.35 Canadian. I don’t need to tell you what it’s worth now, needless to say wishful thinking helped me lose money but at the same time I’ve made some money as well.

    • Really sorry to hear that dude… nothing worse than realising you have made a mistake like that. That said, you moved money for a practical reason which makes it easier to deal with :)

  3. Interesting success story, and great insight. Great post.

  4. I recently wrote about Forex and it was the first time I really dug into the details. It’s definitely an intriguing idea!

  5. I use to trade the euro back in the day. I had a case of red bull, an iPod, computer, and two monitors within 12 feet of me at all times =) I can easily say it was one of the most exciting times of my life.

  6. I really like forex trading and have just done a 3 part series on it here – http://www.monsterpiggybank.com/forex-currency-trading-basics-for-beginners/

Trackbacks

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  2. […] avoid having to fill big spreadsheets of who owes what, with different currencies and the like, he deposits me once in a while, I contribute the same amount, then pay for everything […]

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