How the Forex Market Works
According to Janneth Zamora, Director of Analysis at Monex, the Forex market is where different currencies are traded in pairs, indicating how much one currency is worth in terms of another. For example, the US dollar and the Mexican peso.
Zamora explains, “This market operates 24 hours a day from Monday to Friday, reflecting supply and demand for each currency, which influences their price relative to others.”
Through brokerage firms, investment banks, currency exchange houses, and some traditional banks, investors can access the buying and selling of currencies to aim for short-term or long-term returns, distinguishing investment from speculation.
“The main difference lies in the temporal aspect of each strategy. Investing requires patience to hold a currency for the long term, with the goal of earning returns when its value rises in the future. On the other hand, speculation involves seeking short-term gains by betting on price changes due to potential announcements, primarily macroeconomic ones,” Zamora elaborated.
It’s crucial to remember that operations are expressed in currency pairs and their respective market symbols, for instance, USD/MXN means buying US dollars while selling Mexican pesos.
Zamora listed popular global pairs such as EUR/USD (buying euros in US dollars), USD/JPY (buying US dollars in Japanese yen), and USD/GBP (buying US dollars in British pounds).
Getting Started with Forex Investing
There are several ways to invest in currencies. One well-known method is purchasing currencies in cash at exchange houses and holding them, hoping for significant price changes to sell later.
Additionally, Eduardo García, Director of Investments at Scotiabank, explained that investors can access other financial instruments through banking or investment entities.
“One way is by using debt or capital instruments denominated in foreign currency, allowing you to have a diversified portfolio,” García explained and recommended seeking assets across various geographies.
Some of these instruments can be foreign debt bonds, ETFs replicating a currency index, or more complex assets like futures or financial swaps (also known as currency insurance).
You can start with small amounts in brokerage firms or investment banks, some as low as under 1,000 pesos; however, Zamora warned that some pairs are more expensive than others, so it’s essential to start with a well-planned strategy.
For Mexican investors, it’s crucial that the financial entities where you invest—brokerage firms or financial institutions—are properly regulated and supervised by the National Banking and Securities Commission (CNBV) and the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF).
Who is Forex Investing Suitable For?
According to the Director of Investments at Scotiabank, before investing in currencies, it’s advisable to first understand your investor profile, considering risk aversion—the preference for risky investments, investment horizons, and financial goals.
“Given their daily price fluctuations and potential for losses from one day to the next, it’s important to ask if this suits your investor profile,” Garcia stated. Zamora added that currency prices can be affected by geopolitical tensions, monetary policy decisions, or economic crises.
If you lack experience or feel unprepared to start such an investment independently, consulting specialists who can guide you towards a suitable portfolio based on your profile is recommended.
Key Questions and Answers
- What is the Forex market? The Forex market, or Foreign Exchange, is where currencies are traded in pairs to reflect their relative worth.
- How does the Forex market operate? It operates 24 hours a day, five days a week, reflecting supply and demand for each currency.
- What are some popular Forex pairs? Popular global pairs include EUR/USD, USD/JPY, and USD/GBP.
- How can one start Forex investing? Investors can begin with small amounts in brokerage firms or investment banks, purchasing currency pairs or related financial instruments.
- Who is Forex investing suitable for? Suitability depends on your risk profile, investment horizon, and financial goals. It’s advisable to understand these factors before investing.
- What regulatory bodies should oversee Forex investments in Mexico? The National Banking and Securities Commission (CNBV) and the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF) should regulate and supervise Forex investments in Mexico.
