The Essential Guide to Investing in Foreign Currency

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

The foreign exchange market, or forex (FX), is the decentralized global market for trading fiat currencies. Forex is the largest, most liquid form of investing in the world, with an average daily trading volume of about $9.6 trillion, as of April 2025.

Forex traders buy and sell foreign currency pairs with the aim of profiting from often minute fluctuations in exchange rates. For example, an investor could trade their U.S. dollars (USD) for Euros (EUR). Or, they can trade their Japanese yen (JPY) for New Zealand dollars (NZD).

When the value of one currency rises relative to another, traders may see a gain or a loss, depending on which currency they are buying or selling. Investors must qualify to trade forex, which is a high-risk endeavor and typically involves the use of leverage.

Understanding Foreign Currency Investment

Although there are no centralized foreign currency exchanges, as there are for stocks, forex markets operate via a global network of banks and are open 24 hours a day, five days a week, excluding weekends.

Forex traders strategize around how they expect currency rates to fluctuate; when the value of one currency, such as the dollar (USD), rises relative to another currency, such as the Euro (EUR), traders can either see a profit or a loss, depending on whether they buy or sell the currency that has appreciated.

Traders use standardized abbreviations for each currency that are three letters and act as a kind of ticker symbol, or unique identifier (USD for the U.S. dollar, GBP for the British pound, CAD for the Canadian, and so on). The first two letters indicate the country; the last letter refers to the currency name.

How Currency Pairs Work

Forex trading is conducted using currency pairs, simultaneously buying one and selling the other when the price changes in the desired direction. Thus a forex trade will employ a format that uses both abbreviations: e.g., JPY/CAD or USD/EUR. The first currency is the base, the second is the quote. In order to trade forex, one has to become familiar with the conventions for quoting currency prices.

For example, according to Investor.gov, it’s typical to see the Euro exchange rate quoted in terms of dollars. So a EUR quote of 1.20 means that $1,200 USD will buy 1,000 Euros.

Forex for Retail Investors

Forex trading wasn’t available to retail investors until the 1990s, when the internet made electronic trading platforms possible, and margin was allowed. Prior to that, institutional investors typically placed forex trades over-the-counter (OTC) through a system of dealers and financial institutions known as the interbank market.

Now, however, it’s possible for qualified retail investors to place forex trades using standard broker-dealers. Retail investors may also access the forex derivatives market through futures, swaps, and forwards. The use of margin in forex trades is more complicated than when buying and selling other securities, so it’s important to understand the terms.

Exploring the Benefits of Investing in Foreign Currencies

Like other types of investments, forex trading, or investing in foreign currencies, can offer some benefits.

Portfolio Diversification

For one, investing in foreign currencies can add a degree of diversification to an investor’s portfolio. That means that while an investor may have built a portfolio with a number of other investments, such as stocks, bonds, and ETFs, foreign currency can be another element in the mix. Note, though, that it’s likely foreign currency should only comprise a small portion of a portfolio’s overall holdings.

Convenience and Accessible Markets

The forex markets operate 24 hours per day, five days a week, excluding weekends, unlike the standard stock exchanges. So, for investors who want to trade around the clock, the markets are almost always accessible.

There are four major forex trading sessions in a 24-hour period, split up by international region:

•   Sydney (Australia)

•   Tokyo (Asia)

•   London (Europe)

•   New York (The Americas)

Forex investors can trade from 22:00 UTC Sunday (in Sydney) to 22:00 UTC Friday (in New York). Check the local time in UTC, or Universal Time Coordinated, for your area.

There are minor sessions, too, but these are the four major sessions, and markets can be busy (when the Americas’ session overlaps with Europe’s), or less busy, depending on the time of day, and how many people are actively trading.

Hedge Against Domestic Currency Inflation

It’s possible that while a domestic currency is losing value due to inflation, foreign currencies could retain their value at the same time. That would, theoretically, provide investors with a hedge against inflation, but there’s no guarantee prevailing market forces would work to an investor’s advantage in such a scenario.

4 Ways to Invest in Foreign Currencies

There are several ways to get started in currency exchange investment.

1. Standard Forex Trading Account

First, you can work with a foreign exchange brokerage to trade the currency you’re holding (such as U.S. dollars) for another currency (Euros, Yen, etc.). The goal is that the currency you’re trading for, or buying, will increase in value relative to the currency you’re trading away, or selling.

Only qualified investors can trade forex, because it requires a margin account.

While the goal is straightforward, the process can get more complicated. For instance, there are a few ways to execute trades, such as spot trading, forward trading, and future trading. Spot trading is an instant cash trade, whereas forward and future trading may involve settling on terms at a time in the future (similar to trading options).

Further, investors should understand the concept of the bid-ask spread, which represents the difference between the buy and the sell price of a currency.

2. Currency CDs and Savings Accounts

Investors can also look into foreign currency CDs (certificates of deposit), which work more or less like traditional CDs but might offer higher yields.

Foreign savings accounts are another potential option, although it depends on local regulations. In some cases you must be a resident to open a savings account in another country.

3. Foreign Bond Funds

Investors can look at the possibility of purchasing foreign bonds, which are issued in other countries by foreign governments or foreign companies. There are many types of foreign bond investment types, and the credit quality will depend on the entity issuing the bond.

4. Currency ETFs

As mentioned, investors may want to look at currency ETFs. These ETFs are similar to foreign bond funds; there are also foreign currency ETFs on the market, which offer many of the same advantages of domestic or traditional ETFs, but can give investors exposure to the forex market. Likewise, exchange-traded notes, or ETNs, which are similar to bonds, are another potential investment investors can check out.

Risks Associated with Foreign Currency Investment

Foreign currency investment isn’t without risk, and in fact, can introduce some types of risk that investors may not otherwise encounter, such as political and interest rate risks.

Market Volatility and Political Risks

Since forex markets are so active, prices can change quickly, which means it’s a fairly volatile asset class. The news cycle (including economic, political, or social news) can cause sudden and drastic changes to prices. That means it may be a better fit for investors with a relatively high risk tolerance than those who are more risk averse.

Political risk is something to consider, too, as all currencies are backed by governments. If a foreign government is unstable or otherwise involved in some sort of political drama, it can affect the price of a currency. That can pose a risk to investors.

Interest Rate Risk

Some investments incur interest rate risk, which is when an investment loses value due to a fluctuation in interest rates. Foreign currencies may be subject to such risk, though interest rate risk is more commonly associated with bonds.

Currency Conversion and Transfer Costs

There may also be additional costs associated with currency trading and investing, including currency conversion and transfer costs. These may not always be applicable, but are something that investors should at least be aware of in the event that they do encounter them.

Investing in Forex: Key Points

In order to invest in foreign currency investing as safely as possible, remember, no investment is completely safe or risk-free, investors should brush up on the mechanics of the forex market.

Education Is Key

It’s important to understand the use of “pips,” as well as leverage in forex trading.

•   Ticks and Pips. A “pip” is a unit of measure that represents the smallest unit of value in a currency quote, which goes out to four decimal places: 0.0001. Using the above quote as an example, the difference between the “bid” (1.2100) and the “ask” (1.2104) is four pips. Ten ticks equal one pip.

Why does this matter? Because currency values fluctuate very slightly during the trading day, perhaps only several pips. That means that to make a significant return, traders deal with large quantities of currencies, which typically require margin, or leverage.

•   Leverage. To get to those large quantities, traders who qualify may use a margin account. For example, you may give your broker $1,000 to place a $10,000 trade, essentially borrowing $9,000 on margin. Most forex trading is done this way, using leverage and margin in order to generate returns.

That, of course, has its risks, since traders may incur losses and end up owing money to their brokers. In addition, using a margin account comes with terms and restrictions that can also impact trades.

The Importance of the Bid-Ask Spread

Also noted previously, the bid-ask spread is another important concept to know and incorporate if you’re trading or investing in foreign currency.

Effectively, the spread refers to the difference between a trader’s cost and the dealer’s profits. There’s a slight difference in what you’re willing to pay and what a seller is willing to sell for. In forex trading, the spread can be important to calculating overall potential returns.

Evaluating Risks Versus Rewards

Above all, it’s critical that investors keep their own personal risk tolerances in mind and weigh that against the potential gains they could see from foreign currency investing. It may not be a good fit for everyone’s investment strategy.

Currency Investment Strategies for Beginners

As noted, investing in or trading foreign currency involves pairs of currencies. Some currencies are more widely traded than others and are “paired” with one another or grouped as “major” currencies:

•   U.S. dollars

•   Euros

•   Japanese yen

•   British pounds

•   Swiss francs

•   Australian dollars

•   Canadian dollars

•   New Zealand dollars

There are also “minor” and “exotic” currency pairs. These are not traded as widely as the majors, but are still often swapped on exchanges. They may include pairings with the Hong Kong dollar, the Mexican peso, the Singapore dollar, or the Norwegian krone, among others.

Additionally, investors should know about foreign currency quotes. These quotes are similar to stock quotes, which list the current value, or price of a stock. Forex quotes display the bid and ask prices for a currency pair, since one currency’s value is relative to another currency. Here’s an example of a quote for a common pairing, Euros and U.S. dollars:

EUR/USD = 1.2100

In this example, Euros are the “base” currency, and U.S. dollars are the “quote” currency. That means that a single Euro is equal to 1.21 U.S. dollars.

Find New Opportunities With Currency ETFs

As mentioned, investors may want to look at currency ETFs, which offer many of the same advantages of domestic or traditional ETFs, but can give investors exposure to the forex market.

Advanced Currency Investment Options

While investors can trade currency itself, they can also look at more advanced ways of investing in the forex markets. That can include trading futures and options, or other types of relevant derivatives.

Foreign Currency Futures and Options

First and foremost, investors should be aware of the unique risks that financial derivatives can introduce into their portfolios. Trading options contracts is different from choosing stocks, so before you dive headfirst into forex options, it’s important to understand these strategies.

Currency options are derivatives, with currency itself as their underlying asset. There are calls, puts, and futures. If you’re not familiar with traditional options, it may be a good idea to review the basics before looking at forex options.

In effect, though, these options allow investors to hedge against unfavorable fluctuations of foreign currencies or to speculate on volatility in the forex market.

The Takeaway

Trading or investing in foreign currency is yet another avenue that investors can explore. As discussed, forex trading involves buying one currency with another, with the hopes that the price differences will work in the investors’ favor. Foreign currency markets are extremely liquid, which is another potential upside for some traders.

As always, though, there are risks to consider, and learning the ropes of the foreign currency markets may be tricky. If investors feel like they want to get their feet wet in the market, though, without diving straight in, it may be worthwhile to discuss their plans with a financial professional.

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FAQ

How does forex work in plain English?

Forex trading means buying one currency and selling another with the aim of seeing a profit. For example, if you use U.S. dollars to buy Euros, you might be able to buy more Euros if the value drops relative to the dollar and then sell the Euros for dollars when the value rises again.

Why is forex so risky?

Because the FX market is the biggest, most liquid global asset market, foreign currency prices can fluctuate rapidly. Combine that with the fact that trades are typically placed using substantial amounts of leverage, and there is a high degree of risk involved in most trades.

What is the Rule of 90 in forex?

This is a broad rule-of-thumb which states that 90% of new traders will experience major losses within 90 days that will wipe out 90% of their capital. This is meant as a reminder to exercise caution; it may not be literally true, but it speaks to the risks involved.

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