By Kathy Kristof

If you've been trying to find a place to invest your money and are feeling uneasy with U.S. stocks and bonds, consider looking overseas. You should know that an increasing number of experts are encouraging clients to boost their holdings in international currencies -- a once-rarefied market that's become more accessible to individual investors.

Investing in foreign currency can be a great way to diversify your portfolio. Foreign currency trading, or forex for short, is a little more complex than trading stocks or mutual funds, or shoring up your investment strategy with bonds. Learning the basics, however, can give you a solid foundation to build on if this is an asset class you’re interested in exploring.

Investing in foreign currency can be a great way to diversify your portfolio. Foreign currency trading, or forex for short, is a little more complex than trading stocks or mutual funds, or shoring up your investment strategy with bonds. Learning the basics, however, can give you a solid foundation to build on if this is an asset class you’re interested in exploring. This guide walks you through everything you need to know to get started with investing in currency. If you have questions about forex or other types of investment, a financial advisor can help.

What Is Foreign Currency Investing?

Investing in currency involves buying the currency of one country while selling that of another. This is done through the foreign exchange market, or “forex.”

Forex trading always happens in pairs. For a transaction to be complete, one currency has to be exchanged for another. For example, you might buy U.S. dollars and sell British pounds or vice versa. While you could technically exchange any foreign currency that’s traded on the market exchange for another, it’s more common to trade using pre-establishing pairings.

Here’s how foreign currencies are typically grouped:

Major pairings:

This group includes the most frequently traded currencies. The U.S. dollar (USD), euros (EUR), the Japanese yen (JPY), and British pounds (GBP) are typically included. Minor pairings:

This group also includes many of the frequently traded currencies in the major pairings category, with the exclusion of USD. Exotics:

Here, you’ll typically have pairings of a heavily traded currency against a thinly traded one. For example, USD may be paired with the Hong Kong dollar (HKD) or Singapore dollar (SGD). Regional pairings:

In this category, currencies are paired together based on region. So you might see Asian or European currencies from the same geographic region being exchanged for one another.

Forex trading attempts to capitalize on fluctuations in currency values. It’s similar to trading stocks. You want the currency you buy to increase in value so you can sell it at a profit. Your profit tied to the currency’s exchange rate, which is the ratio of one currency’s value against another.

When looking at pairings, you may want to consider how they’re ordered. For example, in a USD/GBP pairing, USD is the base currency while GBP is the quote currency. The exchange rate is used to calculate how much you’d have to pay in the quote currency to buy the base currency. Any time you buy a currency pairing, you’re buying base currency and selling quote currency.

Stocks and mutual funds are traded on a centralized exchange. Forex is not. Instead, it’s traded through the foreign exchange market, which is managed by banks and other financial institutions. All trades take place electronically and trading can be done 24 hours a day, 7 days a week.

Forex trading can be done through a brokerage. There are three ways you can trade foreign currency:

Spot trading: In this kind of trade, currency pairs are exchanged when the trade is settled. This is essentially instant trading and the spot price represents the price at which a currency can be bought or sold. Forward trading: When you trade forex forward, you agree to buy or sell foreign currency at a set price on a set date in the future. The spot price will be settled and you’ll insulated from volatility when it’s time to trade. Future trading: Future trading s similar to forward trading, with one key difference. In a future trading contract, you’re legally bound to make the trade. The price of the contract is based on the foreign exchange rate of the currencies involved. Once you’ve decided how to trade, you determine whether to buy or sell. The exchange rate may influence that decision. If you’re buying a pairing, you expect the base currency will go up in value. If you’re selling a pairing, you’re selling the base currency and buying the quote currency. You’re also hoping the base currency’s value will drop so you can buy it back at a cheaper price.

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