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An Intro to Currency, Foreign Exchange & why we aren’t a fan of Forex schemes.

Updated: Feb 3, 2022

*This post is a source of information and not advice. When Investing your capital is at risk*

Currency is something the majority of us have come across. Whether it is going on holiday and getting your Euros before you leave, safely investing in Foreign Exchange, or even collecting currencies from around the world (this might just be our favourite hobby)

Before we start with another one of our #EconomicsExplained, we just want to say Investing in Foreign exchange Trading via Instagram will not bring you the promises of a 6 figure return, financial freedom and 2 x 6 month holidays in the Caribbean. They are too good to be true. And when they’re too good to be true, they will more than likely leave you worse for wear.

Let’s first understand what currency is. A currency is a system of money that is used in a particular country. The exchange rate is the price of one currency in terms of another. In other words, what power does a currency hold and how much can you get for it when you purchase another currency.

The exchange rate can be measured in a number of ways. Firstly there is the Spot Exchange Rate, which is the currency at today’s market prices. Simply think of it as the rate on the spot.

Then we have the forward Exchange Rate. Just like the name, we are thinking forward here. This is the delivery of currency at a specified time in the future at an agreed rate. The good thing about this is that it’s often thought to reduce exchange rate volatility.

The Bi in Bi-lateral Exchange Rate gives away what this one is all about. It involves two currencies and the rates at which one currency can be traded against another. Examples are, Sterling to Euro, Dollar to Yen

When someone says the Effective Exchange Rate Index (EER), they are referring to a weighted index of sterling's value against a basket of currencies. The weights i.e how much importance is given to that currency (NOT the weights you pick up in the gym) are based on the patterns of trade between the countries. The U.K.s largest trade partner in 2019 was the United States with $72.6 billion (15.5% of total UK exports) so if we did a Effective Exchange Rate Index to determine sterling's value against a basket of currencies from other countries, we would be using the US Dollar quite a lot.

And finally, the Real Exchange Rate. - this is the ratio of the relative price changes compared to a reference point which is given a value of 100 between two countries. A rise in the real exchange rate implies a worsening of competitiveness for a country

So what does it mean when we say currency is weak or strong?

You may have heard the terms ‘weak or strong’ on the news. A currency is “strong” if it is becoming more valuable relative to another country’s currency. And you guessed it, a currency is considered “weak” if it is becoming less valuable against a country’s currency. So many factors contribute to the strength of a currency, some of which are

Interest Rates, Economic Policy & Political Stability (the U.K. leaving the EU has been a massive contribution to the volatility of the sterling over the last couple of years). I bet you’re thinking ‘okay, so this is all great but how does a weak or strong currency actually impact me?

Well, if your home currency is strong and another country’s is weak, your money will go further and you will become a powerful consumer when abroad. Additionally, when strong, the cost of imported goods will become cheaper. Win-win right? Well, having a strong home currency also means it becomes more expensive for foreign countries to buy products made from you, so exports decrease and this part of the economy will decrease in size as jobs will also be lost.

Okay, so earlier on we gave the red light on Forex trading schemes. You heard it here first, but it is very unlikely that you will get rich off an Instagram forex scheme. In reality, most of these are scams (not groundbreaking news). Which is why you might get, or be aware of a lot of people sliding into the DMs to promote quick and easy foreign exchange trading. Or even more cheekier, they will comment on your Saturday night selfie (go away Paul). Seems like a good deal, right? Well read on! We’re going to give you a bit of background and provide you with a short and snappy introduction to the world of Foreign Exchange Investing.

Investing in currency is all about the buying the currency of one country while selling another - it happens in pairs. For example, you might buy U.S. dollars and sell British pounds or vice versa. Foreign exchange trading is done through the foreign exchange market, or “forex.” The forex trading system is managed by banks and other financial institutions.

These pairs can be grouped in a number of ways. Firstly, we have the majors. This group includes the most frequently traded currencies. The U.S. dollar (USD), euros (EUR), the Japanese yen (JPY), and British pounds (GBP) are typically included. And then the Minor pairings, again this has a lot of frequently traded currencies apart from the USD (something that the US is excluded from which isn’t thanks to Trump). The exotics are next. Sadly these aren’t the currencies of the places with exotic beaches and cocktails, they pairs where there is one heavily traded currency against a thinly traded one. So, to provide an example the USD may be paired with the Hong Kong dollar (HKD) or Singapore dollar (SGD). And then regional pairings. To keep everything simple, these currencies are paired together based on the geographical region. For example, Asian currencies from the same geographic region being exchanged for one another.

Currencies fluctuate. Money is made when you buy a currency when its at the lowest, it increases then you can sell it at a profit.

There are a few key terms you should be aware of:

Bid: The price at which a broker will buy a foreign currency pair from you (Forex traders will tell you it works just like eBay)

Ask: A broker’s asking price for a particular currency.

Spread: The difference between the bid price and ask price.

Did you know the foreign exchange market has a turnover of around $4 trillion a DAY? It’s a very lucrative market.

But why do we feel so strongly that Instagram FOREX schemes are a no no?

Instagram has born a new generation of traders who use their feed to show off fancy cars, bougie holidays and EXTRA clothing. As tempting as it looks, these luxury holidays, and images showing lots of £50 notes next to Louis Vuitton bags (sigh) from ‘being on it with the markets’ (we have actually received a DM saying this) will not bring you about bags and holidays.

Instagram forex traders will often tease you in by saying it requires minimal investment, little time and all you have to do is mirror their actions.

But here’s how it really works.

You are often given a round of profits from your first set of investments to give the impression that you have become a forex trading expert. Then you want to invest more and that’s when you see the returns stop. In some cases once accounts get to this stage, they are suspended and you never hear from the firm again. Over £27million was lost in these forex schemes within 2018/2019. £27 million!

How do I avoid these?

The Financial Conduct Authority set out some clear guidelines to tell whether forex trading is a scam or not.

There are four important things to look for when considering investing in a Foreign Exchange scheme.  

Business foundations: Does the trader or trading firm have a proper business set up with a website, or are they just operating through social media? 

Experience: Does the trader/individuals have any proof they are experienced in trading? At least two years' experience is preferable.

Regulation: Does the trader/education provider have the necessary FCA accreditation for the service they provide? They need regulatory cover either through a trading partner or direct from the FCA.  

Reviews: Are the service reviews of the trader left through a credible review service and do the reviews relate directly to the product being advertised? Celebrity endorsements do not count as credible. 

Fempire Finance

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