Bored With Stocks? More Investors Bet on Currencies

If you're one of those who thinks a dollar doesn't go as far as it used to, then you know how currency traders feel.

Gregorio Borgia / AP

A dollar might not buy as much gas and food as it did nine months ago, but it also doesn't buy as many euro, yen and pounds either.

In fact, the dollar has become the weak sister in the world currency markets, the playground punching bag that regularly gets pushed off the swingset by other denominations that have been supported by their government's monetary policies.

But such is life in the world of currency trading, where even a weak American dollar can mean a big money-making opportunity for smart investors who know when to get in and when to get out.

The currency trade has become increasingly popular as stock markets continue to move sideways and safe-haven government-backed bonds offer low yields.

"You're starting to see more people move to currency trading to try and increase their returns," says Jack Crooks, editor of two currency trading publications with Weiss Research. "People are just waking to the idea that we're very much in a globalized market right now. They're thinking more international about currencies."

Part of the trade's allure is as a hedge against inflation, while other investors like the exposure it gives them to emerging markets.

There are many ways to play the currency markets, from the safety of an exchange-traded fund to the riskiness of currency options and futures contracts.

The currency trade is done in the generic world market known as the foreign exchange, or forex. But unlike the New York Stock Exchange or any of the other bourses around the world, there is no centralized forex trading center. Forex trading occurs wherever currencies change hands.

Trading occurs at a multitude of locations, from banks to brokerages to online trading centers to the Philadelphia Stock Exchange's world currency options center, one of the more popular locales. One of the main advantages of forex trading is that you can buy and sell currencies 24 hours a day, seven days a week.

Currency trades are done in pairs, swapping one for the other. You can exchange your dollars for euros, then buy the dollars back at a later date in the hopes that you can purchase more than you sold, or trade in the euros on another currency.

And you can work with virtually any of the hundreds of currencies around the globe, though most forex trading centers on the eight major currencies--the dollars of America, Canada, Australia and New Zealand, along with the European Union's euro, Japanese yen, British pound and Swiss franc.

There are three ways you can trade currencies--spot, futures and forward.

Spot trading is done at current market prices. You exchange one currency for another and hope the one you bought goes up in value.

Futures trading involves purchasing a contract to buy or sell a currency at a set price in the future. The contract is basically a bet on which direction the currency is going to go. The difference between the price you buy or sell the currency in the futures contract and what it's worth on the spot market is your profit--or if you bet wrong, your loss.

Investment advisers generally recommend setting conservative limits, or puts, on futures trading so as to limit potential losses.

Forward trading involves private contracts that don't necessarily have to follow spot market prices.

CONTINUED: What's the Best Way to Trade?

---

1 | 2 | Next >