There are all sorts of people in this world. While some want their hard-earned money to stay safe at all times, others want to risk something to help their money grow. If you have ever invested in mutual funds, stocks, or 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 often 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 globally, the currency market has one currency traded for another simultaneously.
- You win big when you can speculate exchange rate movements accurately to make a profit.
- Best of all, with its global reach, you can trade anywhere, anytime!
How does currency trading work?
While it seems that 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. So, naturally, sessions overlap, but you will find that those markets’ main currencies are traded during these hours.
- Currency is traded in batches or lots. The smallest micro-lots have 1000 units of the coin, 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, which 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, the RBI does not allow investors to trade in foreign currency in India. 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 access currency derivatives (a contract to exchange one currency for another at a specific price and 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 open to 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 quickly?
Here are just a few of the benefits it offers:
- With the global forex market, you can be assured that currency trading will happen from 9 am to 5 pm in India!
- You can speculate based on happenings worldwide 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! For example, let’s say you are scheduled to make USD payments in a few months, and you see a significant depreciation in INR shortly. 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 have in your account. So, you can change at 10it :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 has its pitfalls. So 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 the hang of things. But 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.