Many investors make the mistake of thinking that just because they aren’t exposed to the forex (FX) market, currency changes won’t affect them. However, this is completely untrue and a sure-fire way to see your investments fail. The big changes that occur on the FX market have a direct impact on your portfolio of investments and their value.
Take, for example, the huge reaction to Brexit, which saw Sterling slide rapidly, or the continued fluctuation in the US Dollar and Euro over the last few months. All these will affect your portfolio in some way even if you have no open FX trades on the table. With this in mind, many smart investors keep a close eye on currency markets to look after their whole portfolio.
Why is FX so key?
The FX market is all about currencies and their value, so it has a big impact on how much each currency is worth against others. What happens in this huge market directly translates into how much stocks are worth or a variety of other investments that you might have made.
The figures around the FX market back up why you need to take notice of it. It is thought that over $5tn dollars a day are traded on it, with the US Stock Exchange accounting for $200bn of that figure alone. When you see just how massive FX is and how much of an effect it has on the value of your other investments, it is clear to see its importance.
How does the currency market impact investments?
The specific reason that you need to be aware of currency shifts for your portfolio is when you come to get a return on any foreign investments or bonds made. If you have invested in this asset class, then you may be liable to get less back then you originally invested if the currency exchange rates have moved against you. Of course, you could be in for a nice surprise if the opposite has happened! This shows that currency moves can return an increase or loss on initial investment classes in some cases.
Even if you invest in UK stocks, you are still at risk. Roughly 70% of the sales made by FTSE 100 companies were abroad. This means that their earnings will rise or fall when exchanged back into Sterling and affect any investment in them. It must also be remembered that currency moves will also affect dividends paid out to investors. Overall, it is clear that currency fluctuations have a great impact on value and price movements for assets within any portfolio.
Keep an eye on currency moves
What can the smart investor do to keep on top of all this? The obvious answer is to stay abreast of the FX market and the related currency changes that could affect any assets in your portfolio. Many investors will actually trade on the FX market as this gives them in-depth knowledge of what is happening and what it means for them.
If you fancy trying out the FX market as an investment and to protect your portfolio from currency surprises, then remember to get educated first. This is a volatile and unpredictable market that needs to be understood before jumping in. The problem is that, in essence, the idea is simple, with traders on the FX market dealing in currency pairs.
It is such a good market to know about as the currency pair that you are looking at may be directly influencing your other investments. If you had bought stocks in a Spanish company but lived in the UK, then the EUR/GBP currency pair would go a long way to letting you know how secure your overall investment was.
Various online resources, including Forextraders.com, will show you all that you need to know about this fascinating market to look after your whole portfolio.
Take steps to protect your portfolio
The chances are that you will have spent a lot of time and money building up a portfolio. With this in mind, you do not want something like a massive currency shift to undo all your hard work. The key thing to remember is that if you are investing in international companies, then changes in the relevant currencies will affect your return as much as changes to the stock price. If you invest in classes that operate overseas also, then the same changes will impact on how much money you actually make on your initial investment.