Forex Folklore – Investment Myths in the Market
The forex market, or the trading of currencies, is the largest market in the world with an average daily volume of $1.9 trillion per day. As governments, large businesses, and banks do most of the trading, the average investor is in the dark when it comes to details about this huge monetary market. Because it is so large yet relatively unknown by the masses, many myths have spread regarding various aspects of the market.
One myth that has been spread by various scam artists looking to swindle naïve investors is that trading in the forex market is a low risk proposition. In fact, trading in currencies can be more risky than trading in equities, as the market for currency is considered “over the counter” (OTC), and is not a highly regulated market such as the New York Stock Exchange or NASDAQ. Because of this lack of regulation, the market is open to manipulation, which can often leave the small retail investor with huge losses. As the forex market is not centralized like a large equities market, it can often be difficult to prove that any manipulation has occurred, so investors are not as protected. In addition, the forex market is open 24 hours a day, except on weekends, and is influenced by events all over the world, so often things can happen internationally that will affect the market while an investor is caught unaware. The forex market is also typically more volatile than the various equity markets, which can mean huge price fluctuations, which compound the risk to the investor.
A corollary to this myth is that some believe trading on margin is risk-free. When an investor trades on margin, he is borrowing money from the investment brokerage to invest in a market, using what is called leverage. By using this loan, one can keep any profits that are generated by the investment without having to come up with the initial money. The loan is eventually repaid when the investment is sold. Many traders use this tool extremely well, making much more money than they would earn using only their own money. But this opportunity also involves a substantial risk, in that if the price of the investment goes down substantially, the brokerage may be forced to give the trader a “margin call”. When this happens, the investment is sold automatically to pay back part of the loan, and the investor is left with a bill for the remaining part of the loan that was not repaid. Brokerage houses do this to protect their equity in the loan and to make sure that they get at least part of the amount back.
Another myth that has been circulating is that jobs involving the trading of currencies on the forex market are plentiful and easy to come by. Particularly in ethnic minority neighborhoods, many poor individuals with high aspirations are taken in by advertisements touting highly-paid account executive jobs requiring no experience. In fact, most of these opportunities require the candidate to invest his own money, and that of his friends and family as he tries to recruit others to join in the profits. The job opportunity turns out to be just another way that the trading company scams the individual out of money.
While many myths involving trading in the forex market have been circulated regarding the risk level and employment opportunities, the truth is that many people have made a substantial amount of money trading in foreign currencies. By finding a reputable broker, one can mitigate the risk and still take advantage of one of the most volatile and exciting investment markets in the world.