What is the Forex Market? It is the largest financial market in the world where small speculators, private banks, central banks, multinational corporations, companies, funds, governments and many other institutions trade. Forex depends on the trade equities, money market, political and economic events. Average daily transactions in this market amounts to more than 3 trillion dollars.Each international trade is accompanied by cash transfers and exchange transactions at banks. Nevertheless, foreign exchange transactions associated with the exchange business today is only about 10% of all transactions in the Forex market, the remaining 90% are speculative transactions. They play a very important role in the market, for example, by providing financial liquidity to companies exporting to hedge against international exchange rate or funds that manage international portfolio of securities. Exchange rates are ruled by simple mechanisms of supply and demand. The increase in demand for the currency increases its exchange rate, and the increase in supply lowers it.
The barrier in making Forex transactions even few years ago was the capital, access to proper technology and information. New opportunities were opened by the development of the Internet. There are hundreds of brokerage firms that provide powerful tools with modules for placing orders, analyzes, current charting courses and providing current financial news from around the world. These companies usually do not charge fees for account maintenance or tools helping with investment decisions. Reward of these companies is so called spread which is the sum of difference between the buying and selling of the currency.
On average, every year for the past 80 years shares grew 11% per year (with reinvested earnings from dividends), and the real estate market grew 7%. At the moment, investment funds (when making long-term projections of future investment returns for the customer) provide an average annual growth rate of 5 to 9%.
Suppose we have an investment of $10,000 and will be saving over 15 years. I assume that CDs, which we keep in the bank have interest rate of 2 to 5%, the shares profit at 9%, and basket trade strategy in Forex will bring 15% per year. Mind that profits are reinvested all the time to let the power of compound interest do its job. After 15 years the profit for the bank deposits will be $20000, in case of shares – 35000 dollars, in case of basket trading – up to $80,000. Please note that in the next, sixteenth year, this strategy would yield 12000 dollars per year (15% of $80000), which is even more than the deposit we used.
Leverage in Forex is a financial instrument used to increase profitability. Leverage makes sense when donating entity with foreign capital, we expect to increase profits, at least to the extent that the repayment of the capital costs. In other words, the operator benefits of leverage, the cost of debt capital is lower than the return on his assets.