Do you know that you can trade a currency that you don’t own? But, how’s it possible? Yes, there are a number of legit ways in which you can trade a currency you don’t already have.
Currency trading has gained wide popularity in India in the recent years. The forex market offers a huge potential for profitable trading to both small and large market players.
Have you heard about derivatives, a highly lucrative market that acts as a wide gateway towards trading? Further, Currency derivatives like futures and options have emerged as a highly popular medium of currency trading in India. They provide exposure to trade in financial markets without actually owning the currency.
Let’s take you deep down the road of currency trading or Forex trading. Make yourself aware of some important trading facts you might be missing out!
Also Read: Currency Valuation- Arithmetic Simplified
What is Currency Trading?
The act of buying and selling international currency i.e. trading in foreign currency is referred to as Currency (FOREX) trading. Usually, banks and financial institutions are involved in Currency trading. However, individual investors can also benefit from the wide variations in the exchange rates of different currencies.
Investors get to earn from the rupee’s movement against other major foreign currencies.
Which currency trading can be done in India?
In India, you can trade only in those currencies that are benchmarked against INR. This means you can trade only in four major INR currency pairs:
- USD INR
- EUR INR
- GBP INR
- JPY INR.
Also, you can trade with recognised Indian stock brokers trading on stock exchanges like National Stock exchange(NSE), Bombay Stock Exchange(BSE) and Multi-commodity Exchange(MCX-SX) who offer access to currency derivatives. So, if you are a resident of India, it’s legal to trade with registered stock brokers provided you deal with specified currency pairs.
Hence, checking the legality of the transaction is very crucial before entering into one. Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBI) are the joint regulators of the currency market in India.
Cross currency derivative segment has also been launched at NSE that shall provide direct foreign currency hedging.
How can one trade in Currency without holding it?
The derivative market provides you common ways of trading in currency without actually possessing it. Derivatives derive their value from some underlying asset like its currency exchange rate for currency derivatives. Two widely acceptable methods are:
- Future Contracts: These are standardized contracts to buy or sell an instrument at a future date and at a specified price. Being traded on the stock exchange, the future contracts follow a daily settlement procedure. The buyer and seller basically enter into an agreement with the exchange and not with each other.
Purchasing future contracts seems to be an ideal way to take advantage of exchange rate fluctuations. The best part is that you don’t need to actively own the currency while entering into the contract. A currency future contract lets you hedge against foreign exchange risk. You agree to exchange one currency for another at a future date but at a price fixed on the present date.
- Options: Option contract gives you the right but not the obligation to buy or sell the underlying assets. Options are primarily of two types:
- Call Option: This gives you the right to buy something at a later date at a given price.
- Put Option: This gives you the right to sell something at a later date at a given price.
So, entering into options contract gives you another good opportunity to earn from currency trading without holding actual currency.
The above currency derivative instruments can be easily bought and sold through the online trading platform. You just need to open a share trading account with a reliable stock broker.
Once your online trading account is opened you are good to go ahead!
Also Read: Should I invest in cryptocurrency?
Currency derivatives are easily accessible to retail investors and give you a chance to earn superlative profits (or losses), may be. But, currency trading is a risky venture just like share trading and might not suit everyone. You must analyse your financial objectives and risk tolerance before immersing yourself into it.
Just make sure to do thorough research on this attractive investment instrument. Keep yourself updated on the regular changes taking place in the forex world. Do it Yourself (DIY) approach sounds good but you always have the choice of getting guidance from reliable stock brokers around.
Does currency trading sound interesting to you? Or are you are satisfied with share trading only when it comes to earning money. Go ahead and drop in your opinions and feel free for any discussion thereon.