Published in Factoidz
We all know that the stock market is volatile, but does that mean no one should trade on the stock exchange? If that happened we would have more than a recession on our hands, we would have a full-scale depression. Remember the great crash of 1929? Well, that crash could occur again if investors remain skittish. According to all financial wizards it is not the time to stop buying and selling securities on the exchange, trading must continue to stimulate the exchange and get it back on a healthy upward swing. However, what needs to be done is the practice of investing wisely.
The standard way of trading is not secure in a bearish market (a market that is down) Some economists say that we are starting to see the beginning of a bull market (upward market) though there is still much debate on whether that is so or not.
There are businesses and private investors alike who must still be careful about how they will buy and sell. Neither large corporations, nor small time investors, want to go broke on the stock market. There are ways to improve your chances of protecting your investments. First of all diversify, do not put all your eggs in one basket so to speak. If you lose on one security it does not mean that you will lose on all of them.
Another thing that is quite popular in this current climate is the practice of creating hedge funds. What hedge funds are, are funds which are limited to a group of investors usually in the million dollar range or more, who can afford to diversify into a large number of risk taking adventures; speculating a capital gain. Since there are so many securities in the portfolio it is expected that the capital gains will outweigh the losses. These funds will include, securities, commodities, derivatives (bonds) and currency trading.
Currency trading is done on the FOREX, which is the foreign exchange market. Currency trading promotes international trading and allows investors to trade in different world currencies. With this type of exchange, one country can trade in the currency of another. An American business can operate in American green backs but buy or sell in the Euro dollar with their European customers. The Foreign exchange market is currently the largest asset market and was established in the 1990’s. There are many advantages for currency trading. It is very liquid and trading volumes are high. It is a trading system that is not limited to one country or location.
The FOREX allows the use of leverage. Leverage simply means that companies can use debt borrowing, which relies on their future purchasing power to deliver assets to the owner at a future date in time. This leverage can produce capital gains and losses. Leveraging can mean a loan to buy stocks or it can employ other forms of debt acquisition..
U.S. banks have been under criticism for leveraging in order to increase stock prices. Even in hard economic times, banks and other high paying organizations will pay out large bonuses to the top executives obtained from stock profits. US taxpayers have not looked on this practice favorably. Delevering is the opposite, whereby borrowing stocks and commodities are reduced.
The FOREX is open 24 hours a day except for weekends. This gives investors worldwide the opportunity to trade with one another. On the other hand, day trading means the exchange closes at the end of the day and that is not amenable to traders trading in different world time zones.
The Foreign exchange market is portioned into several levels. The banks that have interbanking capabilities occupy the highest level. Within this structure is the bid and ask price of stocks, the more volume moved the smaller the difference between the bid and ask price. The inter-bank top-level echelon is responsible for over 50 percent of all currency trading. After this level of currency trading comes the smaller investment banks and then large international corporations who are hedging (high risk security buying). They pay their international employees in the currency of the country in which they live.
Investment management firms will handle big accounts for their investors and they too deal with the foreign exchange market. Retail foreign exchange brokers only account for a small percentage of FOREX trading and sometimes they are implicated in foreign exchange scams. These brokers are regulated through the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). However, many of the small and spurious brokers have been shut down. These are the brokers you hear of who have swindled investors out of their life savings.
There are foreign exchange companies, which are not banks who will trade in foreign exchanges on behalf of companies and private investors. They do not speculate in currency exchange (trade in the currency they speculate is the strongest – more purchasing power). They usually can obtain a better currency exchange rates than if the customer went through his or her own bank.
There are also the money transfer services such as Western Union, which deals with foreign currencies.
The main FOREX exchange is in London, and there are also the Tokyo, Singapore, New York, and Hong Kong, exchanges, which are important FOREX, exchanges as well. Of course there is currency fluctuating, which occurs due to such factors as inflation, gross National Product and so on. When a currency is devalued the stocks trading in that country will be devalued on the open market. One advantage for investors who deal on the FOREX will be that they are able to transfer over to the other currency they are trading with, if that currency is valued higher. That way, they protect the value of their stocks. The US dollar combined with the Euro dollar is a great combination to protect investments trading on the Foreign Currency Exchange.
Remember the trick is not to stop investing, but to invest cautiously in this sluggish market. Stock markets go up and down historically and since this particular stock market has been down for so long the tables will turn and it shall go up again. Investors want to be in the market when it happens. There is money to be made; you just need to know how to do it.