If you invest money in foreign exchange traded funds, there are risks associated with this type of investment. In the foreign exchange trading market, dealers and brokers make deals in financial markets. They primarily barter products, commodities, and money. In the process, some investors make money and a lot of them lose money. Investors have to make fast buying and selling decisions and they must also have excellent communication skills. In 2006, close to $5 trillion dollars were exchanged in this market. Before you invest any money, it is a good idea to learn the risks that are involved in foreign exchange trading.
Foreign Exchange & Rates Risks (Forex or FX)
The foreign exchange rate is the price an investor pay in one currency to buy another currency. For example, ten American dollars is equal to 43.1332 Argentine Pesos. Ten Argentine Pesos is equal to $2.31839 US dollars. It is extremely important that investors know how to use and interpret these numbers when investing because they fluctuate in the markets. Investors have to make buy and sell decisions based on these numbers. Find out how the economy effects foreign exchange trading.
Foreign Exchange & Economic Risks
When you invest in the foreign exchange trading market, you must be able to assess the economic conditions in that country. Read reports about what type of economic policies a government endorses when investing in foreign markets. Also, review the economic policies of banks and other agencies. Find out if the country is operating on a surplus or deficit budget. The markets will react negatively toward huge deficits. Review the inflation levels and check the employment rates. Increased productivity improves the value of the currency. Taking these steps lowers your risk when you invest.
Foreign Exchange & Political Risks
There are foreign exchange political risks when investing in foreign markets. Political conditions have a dramatic effect on exchange trading all over the world. A new party could make reform programs that may cause political chaos. For example, a new government in China decides to increase taxes on all imports by 30 percent to pay-off debts. If a country decides to go war, this action will definitely have an affect or market exchange trading. A country that has hurricanes, earthquakes, terrorist attacks, and political instability are other factors.
Foreign Exchange Low or No Capital Risks
It is very difficult to invest money into foreign markets that have very low or no capital investment money. Investors will almost always lose money when they invest money into poor countries. Be careful when buying currencies of poor countries and when trying to invest in a product or service. Some countries have a weak monetary policy. For example, it would be unwise to invest millions of dollars into a company that sells pork in the Middle East. In some countries, there is no government oversight of businesses that may be corrupt. An investor may put his money in to the project and someone steals the money. These are the risks that investors take when they invest in foreign exchange trading.
Reference:
Iowa State University
http://www2.econ.iastate.edu/classes/econ355/choi/fex.htm
Resource:
Investopedia: Introduction to Currency Trading
http://www.investopedia.com/university/forexmarket/