Forex Gains Currency with Affluent Investors

More than one-third of affluent investors surveyed this month by Millionaire Corner see increased opportunities in currency trading as a result of the European debt crisis.

The euro fell steadily against the dollar last year – including a dramatic one-day fall in December that sent the eurozone currency below the $1.3 mark – as debt threatened the economic security of the eurozone nations and the banks that service them. The economic uncertainty is expected to continue through this year as the European continent teeters on the brink of a recession.

Within the rising dollar and falling euro lies opportunities for currency traders – an opportunity noted by nearly 37 percent of the investors from a range of wealth levels who participated in our January survey. About 43 percent of the more affluent investors – those with a net worth $500,000 to $1 million not including primary residence - say that the European debt crisis has greatly affected their interest in currency trading.

In forex, or currency trading, investors aim to profit from fluctuations in exchange rates between two nations. Investors use relatively large amounts of leverage to achieve their profits – and this leverage is the double-edge sword of risk and reward in currency markets. Leverage can be as high as 200:1, allowing an investor with $2,000 to trade $200,000 of currency. Leverage is obtained through a loan from the financial service provider handling an investor’s margin account.

Forex is the largest financial market in the world – and an extremely liquid one - but it is filled with risk. “Individual investors considering forex trading need to fully understand the unique characteristics of this market and consult their financial adviser before making any investment decisions,” said Lori Schock, director of Investor Education and Advocacy, for the U.S. Securities and Exchange Commission. Leverage enables investors to make significant profits, but it can also work against investors. If a currency moves against an investor, leverage can amplify losses – causing many novice investors to lose their initial investment or more. 

“Leverage magnifies minor fluctuations in currency markets in order to increase potential gains and losses. By using leverage to trade forex, you risk losing all of your initial capital and may lose even more money than the amount of your initial capital,” said the SEC in an investor alert issued in July. “You should carefully consider your own financial situation, consult a financial adviser knowledgeable in forex trading, and investigate any firms offering to trade forex for you before making any investment decisions.”