Foreign exchange or forex is traded around the world in a decentralized market based on simultaneously buying one currency and selling another.
It is mostly traded in the over-the-counter market where brokers and dealers negotiate directly with each other to determine the relative values of different currencies.
There are a variety of ways to trade forex:
- Spot forex involves cash settlements by delivery of the purchased currency on the spot at current rather than future prices.
- Currency futures involve contracts for a specific currency at a set price to be bought or sold at a future date.
- Currency options that provide a right to purchase or sell currency at an agreed upon price.
- Contracts that reference an exchange rate between two currencies where there is no intention to actually deliver the referenced currency. These contracts are often traded on the Internet.
Currently, trades in spot forex contracts are not regulated by the BCSC but trades in other types of forex transactions are subject to regulation. For more information about the difference between spot market contracts and regulated contracts see BC Instrument 91-502 – Short Term Foreign Exchange Transactions. Forex is complex, volatile, and highly risky. Political or economic events and market psychology can affect currency prices.
Can Anyone Invest in This Market?
Yes, but before opening a trading account with any individual or firm to trade forex, other than spot forex where you receive delivery of the agreed upon currency, you should check their registration. Generally, when a BC resident invests in forex securities, the firm or individual the investor deals with must be registered. If they are not registered to trade securities in BC, you should contact the BCSC.
What Risks Does it Have?
It’s important to understand that forex trading is a zero-sum transaction where one party profits and the other loses. Even knowledgeable and experienced traders can suffer significant losses when market conditions change.
There is no central exchange or clearing house for forex transactions. This means that there is no single exchange rate (price) but many different rates depending on the bank or market maker involved in the trading.
Retail forex marketing can be aggressive and aims to make individual investors feel they can be expert forex traders. Seminars and software programs cannot replace the need for research and expert knowledge in forex trading.
Many firms that offer trading services for retail forex contracts, other than spot market contracts, are not appropriately registered as a securities dealers. Take time to understand if the firm offering you trading services is registered or exempted from registration in BC. Unregistered firms are not subject to any of the investor protection requirements that apply to registered dealers.
Fraudsters use forex trading as a means of attracting investors to their scams. Read about forex scams.
Can You Sell it Easily?
Many types of forex contracts, including currency futures and currency options, cannot be sold and must be settled with the firm that offered you trading services in the contract.
What are the Costs?
Firms offering forex trading often charge a commission and/or a mark-up in addition to the market price. In addition these firms frequently make a spread which is the difference in the price they pay for forex and the price at which they buy forex. Frequently, these charges, particularly mark-ups and spreads, are not disclosed and can change over time.
What are the Expected Types of Returns?
Forex trading results in profits when you sell at a higher price than what you paid, taking into account mark-ups and spreads.
While a trade itself may be profitable, investors can still lose money because of overnight fees, referral fees, and other transaction costs.