Improve your small business by increasing your available capital with our guide on how business owners can invest in the forex market.
Most people building a nest egg for retirement or hoping to make a big purchase may want to grow their savings by investing. Forex is very useful for such a purpose, as there are few barriers to entry and the learning curve is not very steep.
What many don’t realize, however, is that small businesses can also benefit from forex trading. By using platforms such as OANDA, small business owners can ensure they have access to money in other currencies while investing their capital in hopes of making a profit on most transactions.
Below is a guide that explains how you can start investing in forex today as a small business owner.
Why currencies fluctuate in value
The key to investing in any asset or security is to predict whether the asset in question will increase or decrease in value. Stocks fall and rise based on perceptions of a company and its performance. Currencies rise and fall in value based on supply, demand, and other factors.
Currencies with high inflation are likely to see a decline in the value of their currency, as the country has less purchasing power due to inflation. Higher interest rates can also impact currency values, increasing them, as investors who have money in that currency can now earn higher returns on their funds. Lower interest rates usually cause the value of the currency to fall.
Political stability, public debt, and the amount of foreign currency held by the central bank of the country in question can also impact the value of that country’s currency. In the event of instability, the value of the currency is likely to fall, while central banks may use foreign currencies to deal with volatility in the value of their currency.
Why trade currencies?
Many business owners may wonder why they need to exchange currencies. There are two main reasons: to have access to money in other currencies and to make a profit on your existing capital.
If you have money in your business account, using it in the forex market is a great way to increase returns. Rather than keeping it in a company checking or savings account, you can get better returns by trading forex several times a week.
Even if you are not interested in growing your capital through forex, but plan to do business in other countries, using the market is helpful. The forex market can help you access the best exchange rates while making small profits on trades.
Types of Forex Trades
There are two important forms of foreign currency trading, spot trading and forward trading. A spot trade is extremely simple, as you agree to exchange currency with another party at a fixed price. The exchange rate is determined by the current value of the two currencies.
A futures trading is a bit more complex, as it involves buying or selling one currency for another at a specified future date. A trader can engage in a futures trade if he thinks the value of a currency will rise or fall within a specified time frame.
When you first create an account on a site that allows you to trade the Forex market, you will likely see many currency pairs. You trade pairs, such as GBP/USD or EUR/USD. Pairings mean the two currencies you are exchanging, such as exchanging a British Pound for a US Dollar or a Euro for a US Dollar.
The currencies that make up the bulk of the Forex market are the US dollar, Canadian dollar, British pound, Euro, Japanese yen, Australian dollar, and Swiss franc. You can trade other currencies, but finding other investors to trade in spot and futures can be a bit more difficult.
Cash, 24 hour market
A significant advantage of the Forex market is that you are participating in a highly liquid market that is active nearly 24 hours a day, seven days a week. Foreign currency trading opens Monday morning in Australia and Asia and continues 24 24 hours until Friday evening in the United States or South America.
The Forex market is extremely liquid, as you can trade spot and futures in seconds. If you are trading major currencies, it is extremely easy to find a buyer who shares the opposite view of your investment.
Grow your business with Forex
Business owners need to leverage all available resources if they want to grow their capital. Whether you access capital through business loans, investors, or other means, you can increase the funds available for your operation through trade.
Although you may not have time to become a stock expert, the forex market is much easier to learn. Trading Forex gives you access to foreign currencies, which can be useful for doing business in other countries. You can also do a profit on most transactions, provided you have some understanding of how the forex market works and why currencies rise and fall in value.
If you are self-employed or run a small business, taking advantage of the forex market is a great way to use your capital.