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Format Forex Trading: Learn the Basics of Foreign Currency Investing

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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The currency markets are some of the most dynamic and high-volume in the world. More than $5 trillion trades hands every day, and currency markets are open 24 hours a day, five days a week, starting Sunday afternoon and running through Friday afternoon.

Here’s what you should know about trading forex, how to invest in the currency markets and whether it’s right for you.

What is forex trading?

Forex, short for foreign exchange, is the trading of currencies, and it takes place in the over-the-counter market or in negotiated transactions between counterparties, such as central banks. In the over-the-counter market, no exchange is involved, and a buyer and seller agree to a purchase price. Currency also can be traded through regulated futures and options markets.

In forex, traders use one currency to buy another, agreeing to an exchange rate for the currency pair. Like any other traders, forex traders are looking to sell the base currency later at a profit, exchanging it back to the counter currency or into another currency that looks attractively priced.

Forex brokers typically allow traders to highly leverage their equity, and it’s not unusual to see leverage of 50 times up to even 400 times the account’s equity. For example, at 100:1 leverage, a trader can buy $100,000 of currency with just $1,000 in equity. So a 1% upswing in the price doubles the trader’s equity. Of course, a 1% downswing wipes out the trader’s equity. However, many brokers limit leverage to 50:1, allowing customers to buy up to 50 times their equity.

In the United States, the currency market is regulated by the Commodity Futures Trading Commission (CFTC), an independent government agency, and the National Futures Association (NFA), a self-regulating industry group. But they regulate the futures and derivatives markets, not the spot market, where much of the trading in forex takes place. The spot market remains unregulated.

Foreign exchange markets explained

Currency trades are always grouped into pairs. For example, a typical trade might be EUR/USD, which is the pair for the euro and U.S. dollar. In this example, the euro is called the base currency, while the dollar is the counter currency. Currency quotes go out to four decimal places, and the first currency is priced in terms of the second currency. For example, the quote for EUR/USD might be 1.1503. This quote means that it costs $1.1503 to purchase one euro.

The standard unit in a forex quote is a pip, an acronym for percentage in point. Because forex brokers quote currencies to four decimal places, it’s convenient to have a term for this fourth digit, and that’s the pip. This is true except for transactions involving Japanese yen, where it’s the second digit past the decimal.

Currency trades are typically placed in lots that are sized as follows:

  • A micro lot: a trade for 1,000 units of the base currency
  • A mini lot: a trade for 10,000 units of the base currency
  • A standard lot: a trade for 100,000 units of the base currency

Brokers will specify the minimum lot size that they will allow you to trade. The minimum often is a micro lot, though some brokers have no minimum size.

The most common way to trade forex is to buy the base currency with counter currency. But more advanced traders often use derivatives such as futures and options to gain exposure:

  • Options give you the right, but not the obligation, to purchase a currency at a specified price by a certain date in the future. You can sell the option before it expires.
  • A futures contract obligates the buyer to purchase the currency if the contract is held to expiration, but it can be sold up until that point to avoid that obligation.

What are some major currency pairs?

There are seven major currency pairs, and the U.S. dollar is on one side of each one. These seven pairs comprise about 85% of all trading volume. In fact, the dollar participates in about nine of every 10 trades that takes place. The major pairs include:

  • EUR/USD: the euro against the dollar
  • USD/JPY: the dollar against the Japanese yen
  • USD/CHF: the dollar against the Swiss franc
  • USD/CAD: the dollar against the Canadian dollar
  • GBP/USD: the British pound against the dollar
  • AUD/USD: the Australian dollar against the dollar
  • NZD/USD: the New Zealand dollar against the dollar

Besides major currency pairs, there are also minor pairs and the exotics — currencies from emerging markets — both of which have a much lower volume of trading.

To measure the strength of the dollar, traders look at the U.S. Dollar Index, a weighted basket of currencies. It’s a quick gauge of the dollar against the currencies of some major trade partners, primarily the E.U., the U.K., Japan and Canada. Sweden and Switzerland are also part of the the basket. When the index rises, the dollar is stronger, meaning it buys more foreign currency.

How to trade forex

The big brokers that dominate stock and bond trading are not always present in the forex markets — though a couple are — but more specialized brokers fill the gap. Whether you go with a traditional or specialized broker, it’s easy to set up an account and start trading quickly, and the process is similar to establishing a stock brokerage account.

If you’re looking for a forex broker, you’ll want to consider the following characteristics:

  • Leverage: How much margin will the broker allow you?
  • Commissions and fees: How does the broker get paid — through a markup on the forex spread or via a straight fee?
  • Minimums: What’s the minimum account size, and what’s the minimum trade size?
  • Currency pairs: How many pairs does the broker offer?
  • Spreads: How wide are the broker’s spreads? The narrower, the better.

In particular, you should pay attention to a broker’s spreads and how they may affect your trading costs. Wider bid-ask spreads can increase your costs, and many brokers will factor your trading fees via a larger spread instead of charging a fixed fee as in stock trading.

For example, let’s say you want to buy 10,000 euros using the EUR/USD currency pair and you pull up a quote on your broker’s site. The bid for euros is 1.1797, while the ask is 1.1799. Sometimes this quote is abbreviated as 1.1797/99, with only the latter two digits quoted. To buy the base currency (euros here), it will cost you 1.1799 units of the counter currency (dollars here).

In this case, since you’re buying 10,000 units, you simply can move the decimal four places to the right, and the total transaction costs $11,799.

Sometimes brokers even quote spreads lower than a pip, breaking down the spreads into one-tenth of a pip. That’s even better for traders whose trading fee is a spread markup since it potentially narrows their costs further.

There are other ways to play forex without going into the forex markets directly. There are specialized exchange-traded funds (ETFs) that allow you to gain exposure to the major currencies and some of the minor ones. Mutual funds also offer currency exposure.

But investors shouldn’t forget that they may already have currency exposure, albeit indirectly, through their stock investments. Major multinational companies derive a huge portion of their revenues from outside the U.S., so their profits usually are already exposed to forex and can move higher when the dollar weakens and vice versa.

What are the risks?

Like any kind of trading, forex comes with its own specific risks. Here are some of the major risks for forex traders and what each means:

  • Leverage risk: Just like in other kinds of trading, leverage in forex can magnify the movement of a currency. That means gains can become increased, but so can losses. With leverage of 100:1, a 1% swing in the currency can double your profit — or your loss. Because of the common use of leverage in forex, it’s important to manage your position size and risk so you can live to trade another day.
  • Political risk: Currencies move for many reasons, but one of the most important is the actions that governments take. A move that is perceived as negative for growth can cause a currency’s value to plummet, as businesses and consumers need the currency less. The U.K.’s 2016 decision to explore leaving the European Union — also known as Brexit — was perceived as highly negative, and the value of sterling dropped in subsequent months. Markets are constantly looking for unstable situations and will discount currencies accordingly.
  • Interest rate risk: All else equal, higher interest rates generally cause a currency to increase in value and vice versa. So when a country’s central bank changes interest rates — especially unexpectedly — or an economy heats up, it can affect how the currency trades. Economies that are growing faster will tend to have higher interest rates, and traders are watching for the relative change in rates in the target countries, not just the absolute level of interest rates.
  • Devaluation risk: A country’s central bank can decide overnight if it wants to devalue its currency, making it worth less vis-a-vis other currencies. A country might devalue its currency slowly over time or in one swoop, and it might do so in order to increase its exports or to reduce the real cost of interest payments on its debt.
  • Exchange rate risk: The forex market can move for fundamental reasons (such as a country devaluing its currency) or for technical reasons (not enough buyers or sellers in the market at a given time). Whatever the cause, traders have to bear the risk that exchange rates will fluctuate, even if the cause is not always clear.

Is forex trading right for you?

Trading forex is not for everyone. With 24-hour markets and the presence of massive players in the market — who can shift trading in the market at their command — it can be tough to be a forex trader.

Also out in the forex market are the following players, each with its own agenda:

  • Central banks: Central banks, such as the Federal Reserve in the United States, can affect the forex markets both directly and indirectly. Their goal is to create economic growth and price stability in their country. Indirectly, central banks set short-term interest rates, which can have follow-on effects in exchange rates. Directly, central banks also can use their domestic currency to buy and sell foreign currencies.
  • Governments: Governments often seek to manage how their currency trades and can intervene directly in the market by buying or selling currencies, perhaps intending to keep the currency strong or weak. They also can devalue their currency.
  • Banks: Banks are among the largest traders in forex markets. They may trade forex among each other, trade to make a profit for their own account or facilitate transactions on behalf of their corporate customers.
  • Professional speculators and traders: These players may include hedge funds and other investment managers, all of whom are trading to make a profit. These traders may take a position in a currency to hedge an investment’s exposure to a specific currency.
  • Companies: Huge multinational companies use forex markets to offset exposure to specific currencies. For example, if a company builds products in one country and sells them to another or many others, then it’s exposed to currency risks. The company might want to offset some of this exposure, especially if there are expectations that currencies will move and affect the company’s profitability.
  • Individuals: Individuals are a relatively small portion of the forex markets, and they’re trading to make a profit for their own account.

Against this backdrop and multitrillion-dollar daily volume, individual traders should carefully calculate whether they want to trade forex. Competitors are huge and can move the market — and, importantly, have motives other than making money. So they take actions that can be completely antithetical to profit, especially yours. These players also are well-informed and know the macroeconomic landscape or at least have access to well-placed advisors who do.

So these elements all can make it difficult for individuals to succeed in the forex market. Traders need to follow and understand the macroeconomic news and reports, and with the markets trading 24 hours a day, new developments can happen at almost any time. Of course, these skills are on top of having the trading expertise to make a go of it.

Bottom line

Some traders can do quite well at trading forex, but currency is not a buy-and-hold kind of asset for long-term investment. Rather, it’s a trader’s game, with active moves in and out of the market, and you really have to stay committed to the practice.

That’s why many individual investors leave forex to the professionals and stick to tried-and-true investing in the stock market. (Here’s how to get started investing in stocks, which have a solid track record.)

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James F. Royal, Ph.D.
James F. Royal, Ph.D. |

James F. Royal, Ph.D. is a writer at MagnifyMoney. You can email James here

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J.P. Morgan You Invest Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Chances are you’ve heard of J.P. Morgan Chase. It’s one of the major players in the financial space, and it’s long had a brokerage arm in addition to providing global banking services. Now, though, J.P. Morgan is getting into the online brokerage space with You Invest.

You Invest is an online trading platform that allows you to buy and sell individual stocks and exchange-traded funds (ETFs) without the need for a human broker. This review will look at what’s offered and provide you with the information you need to decide if it’s right for you.

You Invest offers a way for you to seamlessly connect your Chase bank account to your brokerage account. Additionally, you end up with access to plenty of educational materials and the ability to understand your total portfolio.

J.P. Morgan You Invest
Visit J.P. MorganSecuredon J.P. Morgan You Invest’s secure site
The bottom line: You Invest offers a fairly standard online brokerage experience with the perks of low-cost trading fees and a wealth of investor education.

  • Pay just $2.95 per trade after receiving 100 free trades.
  • Enjoy a large selection of investments, including stocks, bonds, mutual funds and ETFs.
  • Manage investments according to goals with the Portfolio Builder tool.

Who should consider You Invest

You Invest is ideal for beginning investors, especially those looking for education and assistance building a portfolio that will help them reach their goals. Intermediate and advanced investors also can benefit, but the educational tools and resources are especially helpful for novice investors.

Additionally, it connects to your other Chase accounts, making it easy for you to move money from your bank account to your brokerage account and vice versa. If you already bank with Chase, using You Invest to manage your portfolio might not be a bad choice.

While $2.95 per trade is a low cost, this product might not be the best choice for active traders. For traders who can keep their trade volume low, this can be an excellent brokerage since you receive 100 free trades in the first year after an account is opened — with the opportunity to qualify for more free trades in subsequent years.

J.P. Morgan You Invest fees and features

Current promotions

Up to 100 free trades

Stock trading fees
  • $2.95 per trade
  • $0 per trade for Chase Private Client, Chase Sapphire Banking, J.P. Morgan Private Bank and J.P. Morgan Securities clients
Amount minimum to open account
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $75 full account transfer fee
  • $75 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
Ease of use
Mobile appiOS, Android
Customer supportPhone, Chat, 5,100 branch locations
Research resources
  • SEC filings
  • Mutual fund reports
  • Earnings press releases
  • Earnings call recordings

Strengths of You Invest

The educational tools and insights provided by You Invest are where this offering shines. They help you find the right mutual funds and stocks, and get you to understand your investing needs.

  • Low trading fees: To start, you get 100 free trades from You Invest. After you use your allotment, trades cost only $2.95. Among online brokers that charge trading fees, this is one of the lowest. If you’re not an active trader, you might be able to avoid paying fees fairly easily. You can get more free trades each year if you use certain Chase banking products, such as Premier Plus Checking.
  • Educational resources: You Invest offers a number of helpful articles about investing, strategy and more. It’s possible for you to learn the basics and then apply them to your portfolio.
  • Portfolio Builder: If you have at least $2,500 in your account, you can take advantage of this tool designed to help you choose the right investments for your portfolio. You’ll receive guidance on putting together a portfolio based on your answers to questions designed to gauge your risk tolerance, investment goals and time horizon.
  • Powerful screening tools: You can use these tools to set parameters and then find assets that fit your requirements. A list of options appears, and when you’re looking at Mutual funds , You Invest also includes Morningstar ratings and analysis of where they might fit into your portfolio.

Drawbacks of You Invest

A review of You Invest wouldn’t be complete without a look at some of the downsides. In many ways, You Invest is a typical online brokerage option. Other than some of the educational and portfolio building tools, there’s not a lot to distinguish this from other brokers.

  • No standalone app: Rather than offering a standalone app, you access You Invest through J.P. Morgan Mobile. Until you get used to it, it can be somewhat disconcerting to navigate to your trading app within the regular app.
  • Limited account types: There are only two account options with You Invest: taxable and IRA. You can get a Joint taxable account as well as an individual account, and there is a Roth option with the IRA. However, if you’re hoping for a custodial account or 529, you won’t find it with You Invest.
  • No managed portfolios: Right now, you won’t find managed portfolios, but they are supposed to be coming in 2019. So if you’re more of a hands-off investor, you might want to wait until there are more options available.
Fees
$2.95 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Up to 100 free trades

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Get up to $600 when you open and fund an account within 60 calendar days of account opening, depending on deposited amount.

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Cash bonuses are available for new accounts. Bonuses start at $50 if you deposit or transfer $10,000+.

Is You Invest safe?

Any investment comes with the risk of loss. However, You Invest is insured by the SIPC for up to $500,000. Additionally, J.P. Morgan is a member of FINRA. As a result, you’re reasonably protected — especially when you consider that this is a company with more than $1 trillion in assets under management. It’s not likely to fail.

Just make sure you understand your own risk tolerance before you invest. While insurance protects you from failure, you’re not protected from market losses.

Final thoughts

You Invest can be a great option for middle-of-the-road investors who want a little more flexibility in their portfolios but still need some guidance. There are a number of assets to choose from, and the educational tools and resources allow you to build a portfolio based on your long-term goals and expectations.

Depending on your goals, there might be other products that work for you. For those more interested in a hands-off approach, Betterment might be a more suitable choice. You also can make trades for less with a service like Robinhood. However, you might not get the same level of educational tools with Robinhood, and Betterment won’t let you personalize your portfolio to the same degree.

If you want a low-cost, personalized way to invest — learning as you go — and if you’re already a Chase customer, opening a You Invest account might be a good way to move forward.

Open a J.P. Morgan You Invest accountSecured
on J.P. Morgan You Invest’s secure website

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Miranda Marquit
Miranda Marquit |

Miranda Marquit is a writer at MagnifyMoney. You can email Miranda here

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Investing

How to Make Money in Stocks

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Putting money in the market is well-worn financial advice for a reason: Investing in stocks is one of the best steps you can take toward building wealth.But how, exactly, is that wealth built? How is money earned by purchasing stock market holdings, and what can you do to maximize the gains you make from your own portfolio?

How to make money in stocks: 5 best practices

The way the stock market works — and works for you — is as simple as a high school economics class. It’s all about supply and demand, and the way those factors affect value.

Investors purchase market assets like stocks (shares of companies), which increase in value when the company does well. As the company in question makes financial progress, more investors want a piece of the action, and they’re willing to pay more for an individual share.

That means that the share you paid for has now increased in price, thanks to higher demand — which in turn means you can earn something when it comes time to sell it. (Of course, it’s also possible for stocks and other market holdings to decrease in value, which is why there’s no such thing as a risk-free investment.)

Along with the profit you can make by selling stocks, you can also earn shareholder dividends, or portions of the company’s earnings. Cash dividends are usually paid on a quarterly basis, but you might also earn dividends in the form of additional shares of stock.

Micro-mechanics of how stocks earn money aside, you likely won’t see serious growth without heeding some basic market principles and best practices. Here’s how to ensure your portfolio will do as much work for you as possible.

1. Take advantage of time

Although it’s possible to make money on the stock market in the short term, the real earning potential comes from the compound interest you earn on long-term holdings. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains. That’s how stock market earnings increase over time exponentially.

But in order to best take advantage of that exponential growth, you need to start building your portfolio as early as possible. Ideally, you’ll want to start investing as soon as you’re earning an income — perhaps by taking advantage of a company-sponsored 401(k) plan.

To see exactly how much time can affect your nest egg, let’s look at an example. Say you stashed $1,000 in your retirement account at age 20, with plans to hang up your working hat at age 70. Even if you put nothing else into the account, you’d have over $18,000 to look forward to after 50 years of growth, assuming a relatively modest 6% interest rate. But if you waited until you were 60 to make that initial deposit, you’d earn less than $800 through compound interest — which is why it’s so much harder to save for retirement if you don’t start early. Plus, all that extra cash comes at no additional effort on your part. It just requires time — so go ahead and get started!

2. Continue to invest regularly

Time is an important component of your overall portfolio growth. But even decades of compounding returns can only do so much if you don’t continue to save.

Let’s go back to our retirement example above. Only this time, instead of making a $1,000 deposit and forgetting about it, let’s say you contributed $1,000 a year — which comes out to less than $20 per week.

If you started making those annual contributions at age 20, you’d have saved about $325,000 by the time you celebrated your 70th birthday. Even if you waited until 60 to start saving, you’d wind up with about $15,000 — a far cry from the measly $1,800 you’d take out if you only made the initial deposit.

Making regular contributions doesn’t have to take much effort; you can easily automate the process through your 401(k) or brokerage account, depositing a set amount each week or pay period.

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

500 free trades with a qualifying net deposit of $100,000

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$0
Promotion

Get up to $600 when you open and fund an account within 60 calendar days of account opening, depending on deposited amount.

Fees
$0.00 per trade

Per Trade Stock Trading Fee

Account Minimum
$500
Promotion
New accounts with a deposit of at least $5,000, may be eligible for a cash bonus, which can range from $100 to $2,500 depending on the amount deposited.

3. Set it and forget it — mostly

If you’re looking to see healthy returns on your stock market investments, just remember — you’re playing the long game.

For one thing, short-term trading lacks the tax benefits you can glean from holding onto your investments for longer. If you sell a stock before owning it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains — that is, stocks you’ve held for more than a year.

While there are certain situations that do call for taking a look at your holdings, for the most part, even serious market dips reverse themselves in time. In fact, these bearish blips are regular, expected events, according to Malik S. Lee, CFP® and founder of Atlanta-based Felton & Peel Wealth Management.

So-called market corrections are healthy, he said. “It shows that the market is alive and well.” And even taking major recessions into account, the market’s performance has had an overall upward trend over the past hundred years.

4. Maintain a diverse portfolio

All investing carries risk; it’s possible for some of the companies you invest in to underperform or even fold entirely. But if you diversify your portfolio, you’ll be safeguarded against losing all of your assets when investments don’t go as planned.

By ensuring you’re invested in many different types of securities, you’ll be better prepared to weather stock market corrections. It’s unlikely that all industries and companies will suffer equally or succeed at the same level, so you can hedge your bets by buying some of everything.

5. Consider hiring professional help

Although the internet makes it relatively easy to create a well-researched DIY stock portfolio, if you’re still hesitant to put your money in the market, hiring an investment advisor can help. Even though the use of a professional can’t mitigate all risk of losses, you might feel more comfortable knowing you have an expert in your corner.

How the stock market can grow your wealth

Given the right combination of time, contribution regularity and a little bit of luck, the stock market has the potential to turn even a modest savings into an appreciable nest egg.

Ready to get started investing for yourself? Check out the following MagnifyMoney articles:

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here