Well, chickadees, it's been a while since we've gone back to the drawing board with the fundamental terms all of us should know and love, and we all know I'm a firm advocate of having a clear understanding of all options to peruse and park your money with. Think of it as parking your car. If you had a sporty convertible you recently spent your savings on, would you park it just anywhere? Of course not! At least I wouldn't. I'd try to find the parking space with the most air around it so my car can emerge unscathed from any nasty dings or scratches from neighboring vehicles (curse you, Costco parking lot!).
Well, the same sort of thinking should be applied your investments ... after all, your investments are your savings, parading around under the guise of a fancier name. Before you put dump your savings in that new convertible -- er, I mean investment -- you'll need to know what your options are. Do you like to take risks and man the steering wheel? Are you a backseat driver, only giving input when you see fit? Or do you tend to sit back and just enjoy the ride? Regardless of which type of investment is more your style, you have to exhaust the breadth of your knowledge on what's out there. After all, how would you know if you're making the right decision? You could end up screaming "Help!" out the moon roof of a speeding car you never should have started driving in the first place. Which leads us to the word du jour: Forex.
I'm sure many have heard of it, but few truly know what it is. It sounds complicated, so I don't blame you for feeling a little intimidated, but bear with me, it's as easy to understand as fresh strawberry pie (my favorite) .... with a light patina of strawberry glaze .... and perhaps a teensy dollop of whipped cream .... mmmm. Oops, lost in another dessert haze. Le sigh.
Forex is a complex-sounding word for exactly what it is: The foreign exchange market. Get it? FOReign EXchange ... Forex ... there you go. The foreign exchange market, or Forex, is the international exchange market, in which different currencies are exchanged (i.e., bought and sold, much like stocks).
So how does it work? Well, the uber simple explanation is you speculate whether a country's currency will rise or fall, and buy or sell that currency accordingly to try to make a profit. After you've found a currency, like the euro, yen, or pound, that you think will take off (even in the super short term), you contact Forex dealers either by phone or Internet, and they then conduct your transaction for you.
Because Forex is set up this way, Forex traders (like moi, and all of you) essentially determine the price of individual currencies, based upon supply and demand for each. And you thought economics was boring!
Forex is fabulous because:
- While you own a currency you're the recipient of its interest -- and the interest rates vary from country to country. Score!
- It is the largest liquid financial market (if you're not clear on liquidity, click here), meaning that the daily trading volume is so large -- between $1 trillion and $1.5 trillion (yes, we're talking trillions here, ladies!) -- that it's nearly impossible for any one person or fund to affect the worth of a currency by placing one bet on the table for it. Also, because Forex is so liquid, it only takes mere seconds to buy and sell currency because there are always buyers and sellers ready and waiting to snap up currencies. This is much different than the stock market, where some purchases and sells can take hours due to a lack of willing buyers or sellers.
If you're wondering whether Forex is the right investment for you, Forex for Dummies makes a valid point: "Americans may not understand that by NOT investing in currency they actually lost 50% since 2002," -- due to the value of the U.S. dollar dropping -- "but they understand that gas is more expensive, along with many other imported products. Therefore an investment in Forex is not a traditional 'investment' with the hope of potential return, it is a hedge against inflation caused by your local currency fluctuations.
Investors who deal in Forex generally use two research methods to make their decisions (these methods, by the way, are also used in the regular stock market, so pay attention!):
- Technical analysis, which is analyzing your potential investment based on, well, its technicals. This means believing that the current price of what you want to buy already reflects anyfactors in the market. If you're on the technical analysis boat, you generally look at the highest and lowest price of the currency you're analyzing, along with the daily volume (or amounts being bought and sold in the marketplace). By taking a historical look back at the numbers, patterns, and trends a currency or stock hasexhibited, you can make at least a short-term guess of how it will perform in the future.
- Fundamental analysis. Unlike technical analysis, which is based on cold, hard numbers, fundamental analysis is based on the fundamentals of a country that could affect its currency, such as politics, rate of inflation, geopolitical tensions, etc. (This is why magazines such as The Economist are a great read for both news junkies and savvy money honeys alike!).
Keep in mind that Forex is extremely risky -- it's in no way comparable to investing in a mutual fund or CD, and even if you do know how to play the stock market right, it doesn't mean you'll make out like a bandit in Forex. But I guess that dangerous allure of risk and return is what makes this kind of investment a femme fatale in its own right.
Forex for Dummies does point out, though, that just because there's risk with Forex doesn't mean it should be an automatic "no" on your investment radar. "The stock market can crash, but the currency market cannot. If the Forex market for some reason collapsed, we would be back in the stone age, trading cows for gold, and banks would not exist. Unless you are willing to accept this abstract reality, you can be safe and sound knowing that the Forex market will never crash. Anyhow in a scenario like that, only investments in raw materials will be of value (sugar, coffee, alcohol, gasoline, tobacco)."
Then again, I believe that just because something can't crash doesn't mean it's the smartest vehicle for your money. That all varies, again, with what kind of driver -- I mean, trader -- you are. But do know that if you desire strong, positive results, Forex is a very research-intensive, hands-on means of getting there. If you can't commit the time and patience to teach yourself the subtleties of this complex and risky art, there are still a bevy of alternative investments you can choose to go with, but at least now you can be confident in your primary understanding of all things Forex! It wasn't that complicated after all, was it? Now, where's that slice of strawberry pie ...