?Investments are the basic roots of every economy market there is. With the growing economy one of the most common and effect ways is investment. Using the right techniques and following the trend closely, there will be minimal losses and major profit gain. The ideal investment is one with no risks and high profits, which is almost quite impossible to have. In this report, the risks, factors, probability is calculated for Alan and from that an investment plan is draw up to ensure the best possible outcome of Alan’s investments.
Leaving money in the bank to appreciate over the years by the bank’s interest rate is not the most common way investors use to let their money grow because there is very little profit made, but at the same time it is the most safest way of investment. Investors do put their money in a bank, but they don’t rely much on the bank’s interest to earn more since the interest rate is about 0. 37% and the highest being 0. 7%. There advantages of leaving your money in the bank: 1. No Losses Putting your money in the bank is not a trade. With the interest rate that the bank offers, your money would increase. 2.
Insurance Banks provides insurance. This means that the amount of money that you deposit will be secure even when the bank is in trouble Putting your money in a savings account (bank) ensures that none of your money would be lost. But there are drawbacks with putting your money in a savings account (banks): 1. Minimum balance A certain amount of money is needed to be in the account to ensure that the account would still be valid. If not, the bank you require you to pay a fee, and depending on which bank the money would vary. 2. Low Interest rates Banks offers the lowest interest rates, as low as 0.
0010% (HSBC interest rate) and only a certain amount of money has to be put in to obtain a certain amount of interest. If you want your money to make money, a saving account or simply just leaving it in the bank won’t suffice because of low interest rates, but your money would be secured. In Hong Kong, banks offer simple and compound interest depending on which saving plan you chose. And depending on different savings plan they would have different interest rates. For standard charted, a deposit account interest rate is 0. 7%, which is the highest interest rate in Hong Kong and is 0.
33% higher than the average 0. 37% which would be paid annually depending on the money in the bank at the end of each year. This is good for your investment, since you money is relatively growing larger with simple interest. Using foreign currency investment as a way of trade is accompanied with high risks and might not be suitable with everyone. Before deciding to invest in foreign currency, you should consider about your aim, your degree of experience in the field, and how much risk you would allow. Foreign currency investment has a longer-term outcome compared to forex trading.
Foreign currency investment depends on the market, which means that you can either gain a lot or lose a lot. There are two main advantages of foreign currency investment: 1. Large and liquid market The foreign exchange market is one of the most biggest and popular markets due to its flexibility and small investments are allowed as well. The foreign exchange market is much more easier to analysis. 2. Diversification Spread your investments which increases market transacts. This also helps investors to avoid potential risks, reducing the risk of losing money by investing in a range of assets (bonds, stocks etc.
) There are also disadvantages to foreign currency investment: 1. High leverage Since the foreign currency market moves on very small increments, investors need to margin (borrowed capital) to increase the chance of profit from the investment. 2. High volatility High risks due to social, economical, governmental factors. Foreign currency investment depends on the supply and demand of the country currency, which is unstable. The market is open 24 hours 7 days a week, which has a high chance of drastic changes. The currency rates solely depend on the country itself.
How much export and money is made but more importantly the supply and demand of the currency itself. This has quite a number of risks, since supply and demand varies according to factors like social, environmental, economical and so on. To have your money make more money, it would be better to invest more money in the foreign currency account rather than just leaving it in the bank. Now we need to work out the best possible balance of high profit and minimized risks. The top three currencies that have a lower chance of risk and a high chance of profit: 1. New Zealand Dollar Potential trade AUD/NZD to 1.
05. Now 1 AUD is 1. 08 NZD EUR/NZD to 1. 60 Now 1 EUR is 1. 65 NZD 2. US Dollars Potential trade USD/JYP to 108/109 Now 1 USD is 102. 11 JYP 3. British Pound. Potential Trade GBP/JYP to 180 Now 1 GBP is 167. 76 JYP Lets talk about the factors that determine the currency exchange rate. There are six main factors that affect the currency exchange rate: 1. Depending on the difference in Inflation When there is high inflation in the country, the value of the currency depreciates and when there is low inflation in the country, the value of currency increases.
2. Depending on the difference in Interest Rates In the market, there are three things that are all in portioned together, interest rates, inflation and exchange rates. Central banks play an important role in this field, by controlling the interest rates. High interest rates means a higher return payment compared to other countries. More importantly if the inflation is much more higher the value of the currency will decrease.
3. Current-account Deficits Current account is the equal amount of trade between a country and its trading partners, showing all the payments on the goods, service, interest and dividends. Deflect means when the country is spending more money that it is earning and having to borrow more foreign currency and has to make goods and supply more currency than foreign demand to compensate.
The excess goods for the foreign currency lowers the country’s exchange rate till the goods and services are cheap. And foreign products are too expensive for local use. 4. Public Debt Countries go into public debt when unable to pay for public sector projects and governmental funding. This is good domestic economy but is not so good for foreign investors to solve this problem the government tend to print more money, but the problem with this is that it increases inflation.
Foreign investors would not invest in the country because when the debt is paid off later on, they would not received as much money as they would if the country was not in massive debt. Another way that the country does to get out of debt is to selling their bonds to foreign investors at a lower price. This worries investors since the risk is too great and they would not have as much money as they would receive. v 5. Terms of Trade Is the ratio of export prices to import prices and is related to the current account and balance of payments.
If the price of export increases more than the imports the terms of trade improves which shows greater demand for the countries exports. This increases the revenue for exports, which increases the demand for the currency and increase of currency value. 6. Political Stability and Economic Performance Foreign investors prefer stable countries with strong economy to invest their capital in. a political issue can cause decrease in the value of the currency and investors moving to a much more stable economy. Lowered exchange rates welcomes decreasing amounts of purchase of power of income and capital gains from returning.
Exchange rates also influence income factors like interest rates, inflation and capital gains from domestic securities. For foreign currency investment, there are two types; one is short term and the second as long term. Both types of investments have it’s own risks. Short term trading or also known as day trading, is when investors only hold their assets for a short amount of time, from about a few minutes to several days. To do this, investors have to be fully educated on the risks and rewards and must have a good strategy up their sleeve.
Short-term investors must know how to spot good opportunities but as well they have to know how to protect themselves from unforeseen events. The pros of short-term trading are similar to the foreign currency investment (Please refer to page 1 for more details) and another plus point is that day traders, can use arbitrage (a common day trading strategy that involves identifies market differences. An asset price should be the same across the board, but if it isn’t you can sell the higher priced one and buy the lower price one. ) The cons of short-term trading are:
1. High Risk There is never a guarantee of gaining profit and according to the US Securities and Exchange Commission; day traders suffer a lot of financial losses during the first few months of trading. 2. Expensive Day trading is costly, as you need the software and the computers to spot the difference in prices and access certain information. Losing or gaining money you might need to pay taxation. 3. Risk Capital Capital is the money that you can afford to lose. And sometimes during trading you might have to give up capital to protect yourself from losing more money.
And also certain countries require the bank account to have a certain amount of country before trading would be allowed. 4. Tied to nature of current market How much money you earn depends on the environment of the market. Even is there is no change in the market, you still might lose money definitely after commission fees and bid-ask spread they trade into. Day trading is highly pressurized and stressful job to have since it has a steep learning curve and a high chance of loss. The job takes discipline and strategy and you can’t let you emotions affect you decisions.
Long term trading is holding an asset for a long period of time from a year to a decade depending on the investment objective. The pros of long term trading: 1. Predictable Leaving your investment to grow over the years means that the trend you follow are much more predictable. This means that you can work out the trend of increasing and decreasing and you would have a better chance of knowing when to buy or sell. This reduces the risk of losing money. 2. Profitable It is much more easier to profit, since the investment is in for the long haul.
You can predict the trend and also if there is a dip in the market, there is still a chance of an increase. Also the environment is much more calmer meaning that the investor has the better state of mind when deciding. The cons of long term trading: 1. Large initial fee The long term trading strategy requires a larger beginning stop and a slight decreasing stop to allow development, but large stops means large profits. Comparing long term and short term, short term would be better for Alan, even though there is high risks, the Hong Kong dollar is much more suitable for short term since it does not appreciate much in the long run.
But then again which is more suitable for Alan depends on his aim, objective, what type of job he has, what he is more comfortable with, his level of experience and so on. There are five things to keep in mind before investing and during investing. Different types of investment plans would suit different types of people depending on these few factors. 1. Your objective for investing 2. Best use of your money 3. Your age 4. Time before you need money 5. Risk tolerance A lot of investors use both methods to increase their profit gain. And again we need to work out the best balance of high profits and low risks for foreign currency investment.
In conclusion, I have learnt more in-depth about the different types of trading and what is the best way to invest money into the market which less risks and high profit. Citations (Bergen, Investopedia n. d. ) (Bergen, Investopedia n. d. ) (Budgeting Income n. d. ) (Currency strength and weakness n. d. ) (Fox Business n. d. ) (HSBC n. d. ) (Hong Kong Bank Rates n. d. ) (Investopedia n. d. ) (Kuepper n. d. ) (Lein n. d. ) (Mckeating n. d. ) (New Jersey Financial Counseling n. d. ) (Online Forex Trading and Broker Comparsion n. d. ) (Seabury n. d. ) (Sheridan 2013) (XE n. d. ) (Stephen D. Simpson n. d. )