Donna Block
Share World
Everyday I drive the streets of Johannesburg passing posters on street lights and getting pamphlets stuffed through the window of my car with prolific promises of getting rich quick. They profess that money can be made with very little capital and even less man-hours.
I don’t usually pay attention to them and throw them away forthwith. More recently the same type of advertising has been popping up all over the Internet.
The one that really grabbed my attention (with my trader’s mind always turning) was an advert proclaiming that if you opened a currency-trading account with a certain company you could not only make a lot of money fast but win a trip to the Caribbean or Mexico to boot. Just click on the palm tree.
So I did. I figured a peek at what they were offering wouldn’t cost anything and I could always click my “back” button. So off I went.
The promotion turned out to be part of a company’s invitation to transform a $5 000 deposit into a $100 000 line of credit to wager in foreign-exchange markets.
Foreign exchange is a round-the-clock global market where $1,5-trillion changes hands daily as well-heeled investors typically bet large sums on small advances or declines in the relative value of international currencies.
Currency trading has long been the sole bastion of banks, international companies, hedge funds and a few private clients who can afford to bet at a table where the minimum wager is often $50 000 and frequently exceeds $1-million. It’s a game in which the upside potential is enormous – and the losses limitless.
Now, thanks to the Internet, anyone can be a currency trader. Dozens of companies based in the United States, the United Kingdom and elsewhere that specialise in foreign exchange trading have surfaced on the Internet in the past few years.
With a stake of as little as $1 000, individuals can trade yen, euros or other currencies and make big bets for a small down payment.
“Small investors have never seen the type of leverage available in the foreign- exchange market,” says the chief economist at one New York-based financial group that is also a foreign-exchange-trading company on the Internet. “To be able to take a $100 000 position with a $2 000 to $3 000 minimum investment is amazing. This gives them the potential to make the kind of returns they never considered possible.”
Trading currencies on the Internet could also have the same effect that online trading of stocks has had. Individual investors who at times suffer from a herd mentality would in theory be capable of moving currency prices at the flick of a click.
What many individual investors may not realise, however, is the amount of risk involved. In a typical small-scale transaction, an investor can use a $100 000 line of credit to purchase, say, a block of 12,5-million yen at a rate of 136,5 yen per dollar.
A tiny advance in the exchange rate to 137,5, for example, results in a gain of almost $700; a similar move in the opposite direction results in a loss of that amount. At that rate, it doesn’t take many wrong bets to lose an initial investment, the entire amount that the account is leveraged, and a helluva lot more.
Another problem with currency trading is the absence of regulations to protect investors from market manipulation and deceptive sales practices.
Says Richard Comotto, a former Bank of England official:”Given that this is outside the scope of normal legislation in many countries, it’s an invitation to fraudsters.”
It sounds easy, but the reality is there’s no free lunch. Revenues from currency trading at the big banks have been rising steadily over the past year, and branching into the Internet and tackling the smaller investor is just another way of making a buck.
Anyone who considers this type of trading strategy should be prepared to take losses and get out when they’ve reached their limit – otherwise don’t click on the palm tree.