There are all sorts of people in this world. While some want their hard-earned money to stay safely with them at all times, others want to risk something to help their money grow. If you have ever invested in mutual funds and stocks and bonds, you will understand what we are talking about.
Today, there’s a newer avenue for investing in India which involves currency trading. While it has just started gaining popularity in our country, the global market for trading in currencies is many times bigger than traditional investing options. So, let us understand what it is all about.
What is currency trading?
OK! Let’s start with the basics. Global foreign exchange (Forex) dictates the valuation of every currency vis-a-vis another. This is what currency markets play on.
- Among the largest markets in the world, the currency market has one currency being traded for another at the same time.
- You win big when you can speculate exchange rate movements accurately to make a profit.
- Best of all, with its reach spanning the globe, you can trade anywhere at any time!
How does currency trading work?
While it does seem like currency trading is 24/7, the hours can be misleading due to the various time-zones.
- Trading happens in three sessions – Asian, European and United States. There is an overlap between sessions, but you will find that the main currencies in those markets are traded during these hours.
- Currency is traded in batches or lots. The smallest micro-lots have 1000 units of a currency, while bigger lots can have up to 10,000 (mini-lots) or 100,000 units (standard lots).
- Again, since you are betting on exchange rates, currency trading always happens in pairs. So, you essentially buy one currency while selling another in the market.
- The smallest increment of trade is called a percentage in point (or pip). A pip in a micro-lot is equivalent to 10 cents, and it correspondingly increases in mini-lots ($1) and standard lots ($10).
Beginners always trade in micro-lots to manage their losses better.
How does currency trading in India work?
To trade a particular currency, we can only use those currencies that are already benchmarked against it. Additionally, in India, the RBI does not allow investors to trade in foreign currency. So, what does all this boil down to? These are the pairs that Indian investors can trade in:
Indian investors can also legally trade with Indian brokers associated with exchanges like the NSE, BSE, etc. This helps investors get access to currency derivatives (a contract to exchange one currency for another, at a specific price and a specific date out in the future).
Why is currency trading in India becoming popular?
While currency trading in India was earlier limited to financial institutions, it is now opened up for individuals and small investors. And when you can trade through secure channels, right from the comfort of your home, is it any surprise that it’s catching on quick?
Here are just a few of the benefits it offers:
- With the global forex market, you can rest assured that currency trading will happen 9am to 5pm in India!
- You can speculate based on happenings around the world that can impact Indian markets. For example, if oil prices are spiking, it is a safe bet that the Indian currency could depreciate against the dollar. So, you buy USDINR.
- Currency trading in India can help you hedge your foreign exchange exposure too! Let’s say you are scheduled to make USD payments in a few months, and you see a marked depreciation in INR in the near future. Go ahead and purchase USDINR with a fixed rate!
- Brokers now allow you to trade using leverage, e., trade in more money than what you actually have in your account. So, you can trade at a 10:1 where you can risk INR 10 for every INR 1 in your bank.
What are the risks of currency trading in India?
As with any speculative trade, currency trading in India also comes with its share of pitfalls. Go into it with your eyes open and minimize your risks.
- Don’t fall for overnight success stories – Learn the ropes from professional traders with experience. Conduct thorough research yourself.
- Start slow – Some institutions allow you to play with smaller lots or virtual money until you get a hang of things. Don’t hedge too much, too soon!
- Limit your leverage – Trade with what you have. Risking too much, too soon is never a good idea.