By Thomas Kostigen
In last week’s column, we discussed the strongest currency spots around the globe. How to invest in them and the importance of custody relationships in dealing with international securities of all types, is what we’ll cover today.
There are several different types of accounts that you can open to trade foreign securities:
- You can simply open an account at a currency trading broker, or forex broker. Forex brokers provide access to global currencies that you can trade. On the surface, the process seems pretty simple: you pick two currencies to pair, the US dollar versus the Japanese yen, for example. Then you decide to buy or sell one against the other. If you’re right, you profit. Choose wrong, and you’ll book a loss. There are different ways to invest. You can bet the spread between the pair. Currencies trade in “lots,” so you can also purchase lots in each denomination. Or you can buy a CFD (contract for difference) that allows you to bet on rises and falls in the price movements of currency pairs.
- Another way to invest in currencies is through mutual funds. Foreign bond funds are traded in local currencies and can settle in different currencies, too. Professional money managers oversee the day-to-day trading of these funds, just like any other mutual fund.
- Exchange traded funds have also been designed for the currency markets. Currency ETFs can be bought individually, or you can purchase a basket of currency ETFs to broaden your exposure and potentially lessen your risk from losses.
As you can see, each way to trade comes with its own set of disciplines and complexities. And it should be noted that the forex market is fast-moving; huge profits and losses can be made in a matter of minutes, sometimes less! Which is why it is very speculative and risky. Any investment professional worth his or her salt will advise you to tread carefully in this market. Of course, it should go without saying that getting the advice of an investment professional, such as a financial advisor, is highly recommended. Even if you decide to try trading the forex markets on your own, seeking the advice of an advisor (who maybe overseeing the rest of your portfolio) would be wise. Here’s why: they can vet ideas, strategies, and recommend a good custodian for your assets.
Custodians are integral to the investment world. They are responsible for the safeguarding and safekeeping of securities and other assets, and play a huge role in the global scheme of trading, settlement, and financial administration.
The biggest custodians are banks, as might be expected, because they house billions of dollars in assets in both physical and electronic forms. The Bank of New York Mellon, JPMorgan Chase, State Street Bank, and Citibank dominate the custody market. Independent registered investment advisors and the like typically use third-party custodians such as Charles Schwab, Fidelity, or Pershing BNY / Mellon — well-known and trusted firms. (If you are not familiar with the firm that is holding custody of your securities, you should investigate, especially if you are trading any type of foreign security, including foreign currencies.)
In the foreign exchange market, custodians provide important services: trading, settling in a particular currency, and repatriating investment income. Given that approximately $5 trillion trade daily in foreign currencies exchange alone, a custodian’s function is critical to ensure market efficiencies.
While there are enormous profits to be gained in the forex market, there are also enormous risks. Do your homework and seek plenty of advice before putting your money to work trading in the global money markets.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.