Currency investing is one way to make money from dollars, euros and the like. What does it involve and how does it work? Finally, is there a better alternative?
What Is Investing?
Many people these days, especially those not involved in the financial industry, use the term “investing” to mean many things. Generally, it is used to refer to putting some money, time or other resource down and then waiting for an unquantifiable return at some point in the future.
When it comes to financial specifics, investing is the act of putting money into something with the aim of achieving long term returns. Generally speaking, there is no intention to access the invested money quickly. It is not unusual for a person’s money to be “locked up” for a period of ten, twenty or thirty years.
Although anyone can invest at any time, over any time horizon and in any amount (and are often given tax incentives to do so), most investments are those made by pension funds. Pension funds invest billions of dollars each and look to achieve better than (stock) market returns.
One of the most important themes with investing is to minimise risks as much as possible. This is because people’s pensions are at stake and nobody wants to work for 35 years or more and end up with nothing. This is why returns such as 5% per year might sound paltry but you must think of higher returns having been given up in return for much lower risks.
A person or a fund can invest in many things such as stocks, bonds and commodities. Currencies are just one more thing to invest in.
The notion of putting regular money into something and holding onto it for a while in order to get a return is an alien concept to currencies. In many ways, the word “currency investing” is actually an oxymoron.
This is because few people take a long term view on currencies. Few people can say that one currency will outperform another over a period of 20 years. If people do expect this, then this will already be factored into the price.
It is more common to invest in currencies for other reasons e.g. to minimise risks.
Is There A Better Way?
The currency market is the largest financial market in the world and turns over more than $4 trillion each day. Very little of this arises from currency investing. A much larger chunk is a result of speculation.
Speculators, or traders, do not want to buy a financial instrument and hold onto it for 20 years. Over 20 years, an annual return of 5% would give you almost triple your money. Speculators don’t want to wait 20 years to triple their money. Some of them are so impatient that they want to achieve that in a single day!
Trading currencies is much more risky than investing them but it delivers far greater rewards. With appropriate controls, the risks can be kept low too.
And thanks to the internet and advances in technology, trading currencies is no longer exclusively the realm of large financial institutions. Today, any Joe can trade currencies and start off low, trading as little as a penny per pip.
Currency investing has its place. But, ultimately, it cannot be compared to currency trading. In my view, the latter if far superior to the former.