Investing in FX (foreign exchange), currency speculation, and hedging are variations of the same basic investment strategy—you are betting that one currency will strengthen or weaken against the other. Not for the faint-hearted, these investments involve more due diligence and savvy than all of the other security types we have covered so far. Trading in FX is requires a strong macro-economic background and an understanding of interest rates as well.
Investing in foreign [ts]stocks[tm]Stocks are “equity investments” which means that individuals that own stock shares of a company actually own part of that company.[te] is just like investing in local stocks, except you introduce another level of risk. If you try to buy a foreign stock, for example, you are really making two bets at the same time. First you must convert your currency into the currency of the foreign exchange, and then you use that foreign currency to buy one or more foreign stocks. You now have all of the risk and return possibilities of stock ownership, but you are also investing in a foreign currency, which you hope will be profitable when you sell your foreign stock and convert the foreign currency back into your local currency.
Currency speculation and hedging (usually through hedge funds) are similar. You invest in foreign currency believing (sometimes just hoping) that the exchange rate against the dollar becomes more favorable – and profitable over time. As you can imagine, you can make or lose a great deal of money in the arenas of FX (also called FOREX), currency speculation, and hedging.
You should become very knowledgeable or employ a trusted expert to help you become a smart and successful investor in these areas. Most advisors would agree that this area is consistently one of the most “exciting” options for investors.
[mark]Don’t trade FX unless you have an MBA from one of the top business schools, you have a mentor, AND you have $100,000 to burn.[endmark]