The Downside of FOREX Trading
Investors buy and sell all sorts of assets in an effort make profit, such as real estate, stocks and collectibles. Essentially anything that has the potential to increase in value can an investment. Foreign exchange (FOREX) investing is the practice of buying and selling foreign currencies in an attempt to make profit by taking advantage of changes in exchange rates. FOREX trading can potentially result in large investment gains, but it has many notable drawbacks.
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Investment Risk
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Trading in the FOREX market is risky because the value of a currency can fluctuate up or down over time with respect to other currencies and fluctuations are impossible to predict. If you buy a certain foreign currency and its value drops, you could lose a significant amount of you investment. For instance, you might speculate that euros will become more value in the future compared to dollars and buy 10,000 euros for $15,000. If euros do not perform as you expect, you might only be able to buy back $14,000 or $13,000 with your 10,000 euros in the future, amounting to a substantial investment loss. According to the U.S. Securities and Exchange Commission (SEC), losses in FOREX can be large even in a single day of trading.
Transaction Costs
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Similar to buying and selling stocks, you will incur transaction costs when you trade in FOREX. Whether you trade electronically, over the phone or at a financial institution, the organization that provides you with trades may charge a brokerage fee or include a markup in exchange rates. Transaction costs serve to diminish profits and increases losses.
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Scams
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The FOREX market is known to be a source of scams aimed at defrauding consumers of money. The U.S. Commodity Futures Trading Commission (CFTC) says that consumers are often lured into FOREX scam by radio promotions, local newspaper ads and Internet advertisements which promise high investment returns with little risk. Any FOREX investment opportunity that claims low risk or guaranteed returns is likely a scam as profits in FOREX trading are never a sure thing.
Considerations
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FOREX trading is a risky practice that involves a high likelihood of losing money. Investors interested in FOREX trading should thoroughly research investment opportunities and avoid committing money to any opportunity if risks are not transparent. Be wary of any unsolicited correspondences you receive related to FOREX and avoid opportunities that make you feel pressured to commit funds.
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