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Stocks and bonds have traditionally been the preferred asset classes for building a well-diversified investment portfolio.
Stocks, which represent equity ownership in a company, offer the potential for long-term capital appreciation but come with higher risk and volatility. Meanwhile, bonds are less volatile and generate fixed income. By combining these two asset classes, which generally have a negative correlation to each other, investors can balance the level of risk and return on their portfolio.
Typically, when stocks perform badly due to market volatility, bonds are expected to act as a portfolio stabiliser due to their lower volatility and help mitigate the overall risk of the portfolio. However, this is not always guaranteed. In 2022, due to the rapid rise in interest rates, both stocks and bonds tumbled together, leaving investors to bear the full brunt of the market downturn.
In contrast, the broad nominal US dollar index – which is used to measure the value of the US dollar against a basket of currencies widely used in international trade – appreciated by 7.9% during the same period, underscoring the potential benefits of diversifying your portfolio into alternative asset classes such forex.
The forex, or foreign exchange market, refers to the global, decentralised market where banks, institutions, and investors buy and sell currencies to speculate or hedge their portfolios against currency risk. Given the complementary relationship of currencies in an investor’s stock and bond portfolio, it could be another way to profit from your portfolio.
Why Diversify Into Forex Trading?
#1 Longer Trading Hours
Unlike stock markets, which are limited to fixed operating hours in a day, the forex market operates on longer trading hours—24 hours a day, 5 days a week—because of the different international time zones. Moreover, transactions between parties are completed directly rather than through any one central exchange.
Typically, the forex trading hours begin each week from 5 am Monday to 6 am Saturday (SGT). But this may differ by an hour in March, April, October, and November as countries shift to daylight savings on different days.
The longer trading hours mean you have greater flexibility to take advantage of opportunities outside the regular stock market hours. You would also be able to react more quickly and profit from any major market news or events that may affect currency prices instead of waiting for a particular stock exchange to open.
Read Also: Step-By-Step Guide To Opening A moomoo Account
#2 Higher Leverage
Like stocks, FX pairs also trade in minimum lot sizes of one unit. However, for FX pairs, this may amount to placing an investment as large as 100,000 of the base currency unit for a standard lot size or as small as 1,000 currency unit for a micro lot. For this reason, forex trading platforms in general offer retail traders a higher leverage of 20X when trading forex compared to 2-3X for stocks.
Also, the currency movements on FX pairs – which can trade up to five decimal places – could be rather small, whether on an intra-day or weekly basis. As a result, leverage is commonly used in forex trading, allowing investors to profit even from small FX movements on a relatively small capital outlay.
For example, with a leverage of 5% or 1:20 on the moomoo trading platform, you can control one micro lot equivalent to US$1,000 of the USD/SGD cross for US$50.
Source: moomoo (as of 14 March 2023)
Of course, leverage can be a double-edged sword; while it can magnify your potential gains, so does your exposure to potential losses. As with any investment strategy, it’s important to always stay within your risk tolerance and not trade with maximum leverage, as any sharp movements against you, may result in a margin call.
#3 Potential To Generate Additional Income
The forex market is the world’s largest and most liquid financial market. As of 2022, the forex market has a daily average turnover of around US$7.5 trillion. This huge liquidity in the market enables transactions to be placed quickly and more efficiently with tighter spreads.
For investors, forex trading can be another source of income that can be more speculative in nature compared to their long-term or short-term investment portfolio. Given that there are over 190 countries in the world, there are many permutations of currency pairs that could be available for investors to trade in the forex market, giving investors more trading opportunities.
Forex pairs can be classified into 3 main categories, such as:
(1) Majors – They represent the most actively traded pairs such as the EUR/USD, GBP/USD, USD/JPY, and USD/CHF.
(2) Minors – These are currency pairs such as EUR/GBP, GBP/JPY, and CAD/CHF, that are not associated with the US dollar and usually have wider spreads and are less liquid than major pairs.
(3) Exotic – These are currency pairs that include emerging market currencies, which are less liquid and may have even wider spreads than minor pairs. These include USD/SGD, AUD/SGD, and USD/MXN.
On the moomoo trading app, investors can trade over 30 currency pairs along with stocks, bonds, and options.
Read Also: How Can We Earn Even Higher Returns While Investing
#4 Can Execute Both Long And Short Trading Strategies
Markets go up and down in cycles affected by a multitude of factors like trade flows, policy changes, economic data, and geopolitical news events. While most stock exchanges allow long-only trades, there are no such limitations with forex trading. Investors would be able to make both long and short directional plays to profit from the global macro trends.
This can be useful given that (1) markets come down faster than they go up, and (2) forex trading may see bouts of volatility during major news announcements like the CPI data, unemployment data, and ISM manufacturing PMI. You can stay on top of such news with moomoo’s Financial Calendar, which allows you to filter based on country and importance level—the higher the stars, the more important the economic data.
Source: moomoo – Financial Calendar
Investors could also take advantage of trading different pairs based on their relative strengths and weaknesses between the base and quote currencies.
#5 Can Use To Hedge Foreign Stock Holdings
When investing in stocks, it’s reasonable to expect short-term fluctuations or periods where the market may move sideways. Some investors may use derivatives like options to hedge their long-term investments.
In the same way, investors can hedge the currency risk that they are exposed to when buying overseas stocks. Without hedging, Singapore investors who buy US stocks may see their returns reduced if the US dollar falls against the Singapore dollar by the time they sell the stock or may make additional returns if the US dollar strengthens against the Singapore dollar.
To minimise the currency risk, investors can sell the foreign currency of their stock holdings and buy their home currencies, thereby locking in the exchange rate. For example, if you bought US$10,000 worth of Tesla shares at a 1.34 exchange rate (US$1 = 1.34 SGD), you can sell the USD and buy SGD to hedge against any fall in the exchange rate.
This can be particularly useful when large FX movements are expected in the market. While hedging can help reduce the uncertainty when investing in overseas stocks, investors also have to understand the risks and consider the financing costs involved.
Read Also: Treasury-Bills, Fixed Deposit Accounts Or Money Market Funds: Pros And Cons Of Using These Fixed Income Investments To Protect Your Capital
Moomoo Singapore Offers Forex Trading
You can now trade forex on moomoo along with stocks, futures, and options. Enjoy zero commission costs and low spreads starting from just 0.6 pips on major pairs like the EUR/USD and USD/JPY. You can also enjoy exclusive monthly FX rebates* from US$30 to US$200 when you trade between 10 and 200 lots.
Look for the Forex tab under Markets in the moomoo app to see the full list of tradable FX pairs. The FX pairs are categorised based on geographical regions such as Asia-Pacific, Europe & Aemericas, and others. You can also get a quick overview of the price movements between the different pairs to get a better understanding how the specific pairs perform against each other.
From here, you can select the FX pair to trade on. For example, if you selected the USD/SGD pair, you will be directed to the quotes page, as shown below. Here you will get live quotes and charts, share or read comments posted by fellow moomoo users, and stay updated on the latest news relating to the FX pair.
When executing your trade, remember to enter the lot size and select the direction of your trade.
Source: Moomoo 14 March 2023
Placing a forex trade on moomoo is that simple. With this new feature it is now more convenient for investors to diversify and manage their portfolio in various asset classes in just a single investment app. Sign up and download the moomoo app today and take your investments to the next level.
*Terms & Conditions apply.
All views expressed in the article are the independent opinions of DollarsAndSense. Neither Moomoo Singapore or its affiliates shall be liable for the content of the information provided. This advertisement has not been reviewed by the Monetary Authority of Singapore.