Investing in foreign currency is gaining the attention of an increasing number of investors. Foreign currency is particularly attractive for those who seek alternative investments that are relatively low risk and do not require a good deal of active participation. Although it may sound nebulous and a bit exotic, trading foreign currency can deliver both short and long-term benefits to savvy investors.
Investing in foreign currencies can be particularly beneficial for individuals living in countries with volatile economies, or those that transact in currencies prone to fluctuations in value.
This guide provides you with important information regarding why investing in a foreign currency might be a good option. We will examine the pros and cons of trading foreign currency, list the best currencies to trade in, and give you some strategies to make the most of your investment, so you can decide for yourself if buying foreign currency is a good investment strategy for you.
Key benefits of investing in foreign currency
There are quite a few benefits to investing in a foreign currency. They include:
· Diversification – Using one currency exclusively as an asset class puts you at a higher risk of losing money. The forex (foreign exchange) market offers you a way to hedge against potential currency risks related to using just one currency as an asset class. For a truly diversified portfolio, experts suggest considering a varied allocation of assets (currencies, in this case). Over time, portfolios with multiple asset classes exhibit less variation in returns than portfolios with a single currency/asset class. And you, as the investor, get to stay the course, enjoy lower risk, and achieve financial goals in the long run. With Cashero you can hold USD, GBP, and EUR at the same time, offering you the diversification of 3 of the world’s strongest currencies.
· Convenience – Forex is open 24/7 and enables you to deal in different time zones from all over the globe. This means that you can make the most out of your investment without being tied to your regular working and waking hours. And with the plethora of forex mobile apps available, you can make transactions even on the go while also keeping yourself updated at any given time. This 24/7 market also means your money is always working for you when placed with Cashero. Offering an average return of up to 5%, you can check the app anytime, and watch as your money grows.
· High liquidity – The forex market is the most liquid market in the world due to the high number of market participants. In fact, its average daily volume exceeds $5 trillion, which is more than impressive. Liquidity, in this case, pertains to the value of the foreign currency you’re trading and its conversion to actual cash. The more a currency is traded, the easier it is for you to convert it into cash. It should also be noted that foreign exchange has a very predictable pattern. This allows investors to forecast when it’s a good time to sell or buy currencies more easily.
· Low fees – Most of the time, you’re not required to pay a commission for foreign currency trading. Foreign exchange trading only involves a bid spread that is usually tighter than equities. Even in this case, however, you can still find competitive exchange rates and premiums with the right forex broker. Cashero’s tech-stack allows us to keep things fast and affordable, so we pass that along to our customers.
· Low capital – You don’t need a massive amount to open an account — you can start with something low and add to it at a later time if you wish. The even better news is that you can start gaining profit almost instantly via short-term trades where you can liquidate your foreign currency assets within just a few days. With Cashero there is no minimum balance needed to open an account, so you can begin building a strong, diverse portfolio the moment you make your first deposit.
The cons of foreign currency trading
Perhaps the most important factor to consider before deciding to start invest in foreign currency is the fact that the forex market is directly affected by external factors, such as political and social developments. For that reason, it’s critical to ensure you stay up to date on current affairs, especially if you transact and hold currencies that are subject to frequent fluctuations in value. Of course you don’t need to know everything that takes place around the world – just what is going on in the respective economies that affect your investment.
The basic concept of foreign currency investing
Things are pretty simple when investing in foreign currency. You are simply exchanging the current value of one currency, for the equivalent value of another. To begin, you need to take a look at the value of the currency you want to invest in and then compare it to the currency you are using, also known as your base currency. For instance, if your base currency is GBP, and you want to trade with USD and EUR, we can use the following example. Let’s assume that the current exchange of GBP to USD is 1.36. That means 1 GBP is equivalent to 1.36 USD. So if you exchange 100 GBP into USD you’ll receive 136 USD.
Now let’s imagine that you are holding both GBP and USD, but the value of GBP goes down, to an exchange rate of 1.15. This means that now 100 GBP is equivalent to 115 USD. But because you were still holding your original 136 USD, that has now increased in value compared to the falling GBP, this offered you some protection against financial loss.
With small numbers like this, it may not seem like much of a difference, but currency price fluctuations can have a massive impact on an individual’s financial life in the event of an economic crisis. Diversifying into forgein currencies can help protect against this.
The best foreign currency to buy and sell
According to forex trading experts and analysts, the best foreign currencies to buy for stability are the US dollar, the Euro, the Great British Pound, the Canadian dollar, the Swiss Franc, and the Japanese yen. Cashero currently offers customers the ability to hold the US Dollar, the Euro, and the British Pound.
Below is a list of the 10 strongest currencies from 2020 valued against the US dollar, which is regarded as the world’s most traded currency, to give you an idea.
1. Kuwait Dinar (1 KWD = 3.27 USD).
2. Euro (1 EUR = 1.18 USD).
3. Bahraini Dinar (1 BHD = 2.65 USD).
4. Omani Rial (1 OMR = 2.65 USD).
5. Jordanian Dinar (1 JOD = 1.41 USD).
6. Swiss Franc (1 CHF = 1.10 USD).
7. Cayman Islands Dollar (1 KYD = 1.20 USD).
8. Pound Sterling (1 GBP = 1.30 USD).
9. Canadian Dollar (1 CAD = 0.76 USD).
10. US Dollar
The weakest currencies in 2020
Again, the weakest currencies listed here are valued against the US dollar.
1. Iranian Rial (1 USD = 42,105 IRR).
2. Vietnamese Dong (1 USD = 23,175 VND).
3, Indonesian Rupiah (1 USD = 14,697.50 IDR).
4. Uzbekistani Som (1 USD = 10,291.68 UZS).
5. Sierra Leonean Leone (1 USD = 9,762.50 SLL).
6. Guinean Franc (1 USD = 9,666.80 GNF).
7. Laotian Kip (1 USD = 9,109.49 LAK).
8. Paraguayan Guarani (1 USD = 6,989.35 PYG).
9. Cambodian Riel (1 USD = 4,101.44 KHR).
10. Ugandan Shilling (1 USD = 3,686.64 UGX).
Considerations to factor before trading foreign currency
Before diving headfirst into investing in forgein currency, it’s worth bearing in mind the following:
- Selling and buying foreign currency is done in pairs. In other words, you buy one currency (i.e., EUR) and sell in another (i.e., GBP). You can choose among many different combinations. However, the most popular currencies are the ones mentioned in the list above as the strongest world currencies.
- Experts recommend building a portfolio on well-established foreign currencies.
- Always consider things like your local currency, tax reporting requirements, and political and social climate of a location when deciding which currencies to put in your investment portfolio.
- A digital platform like Cashero, is probably one of the best places to obtain foreign currency for investment purposes. Digital based platforms offer instant transactions, along with low fees, and in the case of Cashero, you earn interest regularly on your investment.
All in all, if you’re thinking about diversifying into different currencies, you should consider the most stable currencies first, such as the USD, the EUR, and the GBP. All of which are offered by Cashero. Your portfolio will definitely thank you later.
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