Posted by forex at 5:11 AM
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Ways to Trade Currency Through Stock Prices
1. Trade currencies through one of three methods. Buy the stock of companies domiciled around the world where the stock is traded in currency other than the U.S. dollar. You assume stock and currency risk. Buy mutual funds that only represent overseas holdings and assume the risk of portfolio performance and currency fluctuation. Buy an exchange-traded fund that only invests in short-term instruments of different currency. You assume only currency risk.
2. Determine the risk you can tolerate and trade accordingly. The stock market can be used as a currency play on an intermediate or long-term basis. Transaction costs for currency plays are not as efficient the futures market, so day trading may not be efficient.
3. Study an ETF resource such as etf.stock-encyclopedia.com (see resources) for a list of all exchange-traded fund currency issues. It is best to use currencies that are widely established and tend to trend in broad-based moves, such as the U.S. dollar, the Swiss franc, the Euro, the British pound and the Brazilian real. You could also make a long-term play in a basket purchase of emerging-country currency.
4. Consider buying mutual funds and stocks of emerging countries. If the rate of growth of business and the increase of credit balances continue, the investor receives a double boost of good news--capital appreciation of stocks held in a relatively strong currency. This happened with Japan from 1945 to 1988.
5. Equities are the best way to play currency movements for the investor not prepared to make substantial commitments to the futures market. The ability to invest in straight currency plays or invest in the double-barrel effect of stock and currency markets is readily available through different instruments. A middle ground is to invest in a world bond fund where the portfolio is populated with intermediate-term bonds from around the world. This is not usually a good choice, however, as the yield is lower than other comparable alternatives, and all the different currencies tend to neutralize each other.