Mark Hauser, an experienced financial advisor and private equity investor, breaks down the forex marketplace.

In today’s highly connected digital marketplace, local consumers often purchase products from merchants across the globe. Companies fre- quently buy business equipment, software applications, and other ser- vices from international partners. Equally importantly, financial traders buy and sell foreign currencies on the foreign exchange (or forex) market.

Private equity principal Mark Hauser explains the forex trading fundamentals. He also offers insights into the upsides and downsides of trading in this complex financial market. Finally, he highlights the U.S. Securities and Exchange Commi- ssion’s timely warnings to forex traders.

Snapshot of the Foreign Exchange Market

The phrase “foreign exchange trading” (also called forex trading) refers to the purchase and sale of foreign currencies. Each forex trader seeks to make a profit on one or more transactions. However, they should also be prepared to experience a loss.

The forex market consists of individual investors along with large-scale business entities. Banks and other financial institutions, insurance companies, and large corporations regularly use the forex marketplace to manage currency rate fluctuation risks.

The United States stock market operates from Wall Street in New York City. In contrast, the virtual forex marketplace is an integrated network of brokers and computers across the globe.

The forex market is open 24 hours a day for 5 ½ days every week. The trading day begins in Australia and progresses to Europe along with the time zones. Although the trading day wraps up in North America, markets see some overlap throughout the day.

3 Foreign Exchange Market Segments

The global foreign exchange marketplace is separated into three primary submarkets. Private equity expert Mark Hauser notes that each market serves a distinctive trading niche.

Spot Market

Very large trading entities, such as governments and banks, trade on the forex spot market. Participants trade at the currency pairs’ specific values at that exact point in time. These “spot trades” can extend for seconds or minutes, with larger traders making their profits on volume. For reference, real-time spot market trades can impact United States firms’ export costs and U.S. residents’ overseas travel expenses.

Forward Market

This more complex market trades on the belief that currency prices will change in the future. Two parties agree to a forward market contract, desiring to complete the transaction at a mutually agreeable future date. These forward market purchases are designed to decrease forex trading’s embedded risk.

Futures Market

The forex futures market somewhat resembles the forward market. However, forward market contracts exist between two distinct parties. In contrast, the futures market operates on standardized contracts. Each contract varies based on the involved units’ quantity and length of term.

Profile of a Typical Forex Transaction

Private equity expert Mark Hauser explains that foreign exchange trading has a simple goal: to purchase currencies at decreased prices before selling them at higher prices. Successful traders typically earn a profit.

The trader must ideally predict foreign currencies’ values when matched against each other. Predetermined currency pairs are needed for every forex transaction. 30 (or more) paired currencies are traded daily.

Not surprisingly, the U.S. dollar is included in many transactions. Other frequently paired currencies include the Australian dollar, Canadian dollar, and New Zealand dollar. The Japanese yen, the euro, the Great Britain pound sterling, and the Swiss franc are other frequently matched currencies.

Once the trader selects their currency pair, they decide how many units of one currency they can buy with the other paired currency. One currency will increase in value while the other loses value.

Like other high-risk/potentially high-reward ventures, the forex market is known for its volatility. Inflation and consumer confidence can play a role in currency valuations. Geopolitical events can also affect their respective countries’ currency values.

Forex Trading: The Pros and Cons

With well-known high risks, forex trading is not for the faint of heart. However, well-prepared traders can potentially recoup their investment ─ and more. Private equity principal Mark Hauser details the advantages and disadvantages of this intriguing income-generation method.

The Pros of Forex Trading

Foreign exchange traders enjoy three distinct advantages. First, this worldwide marketplace welcomes participants from virtually any location. With an Internet connection and specialized software, traders can log in from numerous countries and several continents.

Many professional careers require a college degree and/or formal training or certification. However, private equity expert Mark Hauser notes that forex trading doesn’t have those barriers to entry. In fact, the forex marketplace is open to almost anyone.

Individual investors aren’t required to obtain an organization’s sponsorship. Many broker sites permit individual investors to create a personal profile and fund their own trading accounts. These entry requirements are similar to those for stock traders.

Some forex broker sites provide newer investors with trading advice and training packages. A number of sites allow aspiring traders to hone their trading skills without making a financial investment.

The Cons of Forex Trading

Foreign exchange trading also has three significant downsides. First, this type of trading sharply contrasts with purchasing stock market shares. Although novice forex traders can practice their skills before jumping in, real-life trading brings a high chance of financial loss.

Forex trading is subject to more potential disruptions than stock market transactions. Interest rates and political dynamics are high on the list. In addition, traders often find it difficult to predict currency price movements. Taken together, these factors make forex trading a high-risk investment proposition.

Finally, the forex market is plagued with financial fraud schemes. To illustrate, the Commodity Futures Trading Commission (or CFTC) warned investors about romance scams built on dating apps. Because traders don’t make transactions in person, they could be convinced to transfer funds to a scammer on a fraudulent platform.

The SEC Issues Forex Trading Warnings

The U.S. Securities and Exchange Commission, the regulatory body for United States-based securities transactions, provides aspiring forex traders with additional warnings. Investment risks include “non-uniform currency quoting conventions” along with trading systems that may not function as designed.

Unclear transaction expenses could provide traders with an unwelcome surprise. In a similar vein, unexpectedly steep transaction costs could result in a trade loss.

The SEC also advises that traders could lose their entire investment at any time. Depending on the investor’s agreement with the exchange dealer, the trader could potentially be liable for losses beyond their initial cash outlay. For these reasons, private equity expert Mark Hauser strongly recommends that novice forex traders think twice before entering this volatile market.

Finally, the SEC and CFTC have initiated formal actions regarding alleged forex fraud. Investors should contact the applicable federal regulator to determine the membership status of certain individuals and forex trading firms.