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The Role Of Foreign Exchange In The Economy

How you can benefit from Forex exchange begins with understanding the following.

Jeff Broth

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Forex-exchange

We began the year 2016 with commodity prices going south and stock markets fluctuating randomly; leaving investors with little room to navigate through the murky financial markets waters.

The cooling off of demand in Europe and China served only to worsen the already bad situation, hence dampening the hopes of having a quicker recovery in the markets. However, as the economy faced challenging moments that it is trying to get out of in the second quarter of 2016, traders in the forex markets continued to make money all through.

This market presents a good option to invest your money in even when the global economy is on a gloomy mood.

To get into this exciting financial markets segment and start making money there, you will however need some basic forex education to help you understand how the market works.

Related: Enko Education Investments Matches Money With Passion

The forex market is the largest market segment in the financial world with approximately a daily turnover of about 5 trillion dollars. With millions of traders located in different time zones, the market is usually open on a 24 hour basis hence enabling traders to make money round the clock.

The beauty of forex trading is that it is not regulated by a central body such as we have the Financial Services Board in South Africa that regulates capital markets and the central bank that regulates the commercial banks and their activities.

In the forex markets, there are unwritten protocols that are followed by all the market players and the whole market is considered to be self-regulating.

Forex markets are not just there by chance by they are there to play a very critical role in facilitating international trade. The term forex by itself it is a short form for “Foreign Exchange”, which simply is the exchange of a local currency for a foreign currency or vice versa.

There are a myriad of reasons why one would like to exchange their local currency for a foreign currency but the major reason is to make international payments.

Multinationals operating in different countries across the world have to buy raw materials and other inputs for their subsidiaries in the foreign countries. In addition, they have to pay their utility bills for their subsidiary offices and pay their employees too.

All the above payments have to be made in the local currency in the country where the subsidiary is located. If the parent country is located in South Africa and the subsidiary is located in the United States of America, then the parent company will need to convert the South African Rand into US dollars for the payments to be made in the US.

Related: Understanding Total Return of Investment

This creates a demand for US dollars which the forex traders will provide to the South African parent company at a given exchange rate. The company will then use the dollars to make payments in the US subsidiary.

In other cases, you may want to travel as an individual to another country either for business or for tourism. If for example you are travelling to Kenya to go and enjoy a Safari Tour in the wilderness of Maasai Mara, you will need Kenyan shillings for all your transactions while you are there.

This again creates the need for an exchange of the local currency with the Kenyan shillings and hence a forex trader is involved in the exchange process.

Governments too borrow from oversees in foreign currencies and they need the foreign currencies for repaying both the interest and principle amounts of the loan when they fall due.

This again creates a demand for the foreign currencies and the exchange happens through the forex markets. When governments and institutions are involved in import and export businesses, again the currency of payment is usually the local currency of the exporter and therefor the importing party has to exchange its own local currency to the currency of the importing country in order to make the payment.

Foreign-trade-advice

With millions of such transactions described above happening every day, the forex market has undoubtedly to be the largest among all financial market segments.

The trades are usually connected by computer systems and they do all the transactions online. For an individual investor, you get into the market as a speculator who aims to gain from the currency fluctuations.

The exchange rate of a given currency is always determined by the forces of demand and supply. For example, if more dollars are being demanded to make international payments and for imports, the value of the dollar goes up against the South African rand; and when the local currency is being demanded more, then the South African rand appreciates in value against the dollar.

Related: What Are Tax-Free Investments?

As a speculator you get to the market to capitalise on these changes in prices and make a gain. Your involvement is however through an online forex broker who provides the platform on which you trade and you pay them a commission for the services.

Speculators exist in the market to create liquidity but they are not the fundamental reason why the forex market exists. The basic foundation of forex markets is to facilitate international payments and cross-border movement of individuals.

Jeff Broth, a business writer and advisor. Consulted for SMB owners and entrepreneurs for 7 years now. Mainly covering finance, stocks and emerging fintech trends.

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1 Comment

1 Comment

  1. Fred Johnson

    Jun 20, 2016 at 19:22

    Interesting but what are the charges/fees these traders and banks make? If it’s a digital process then surely they should be small?

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Decrypting Cryptocurrencies

Your guide to understanding cryptocurrencies, why they are so popular and how you can use them.

Brenton Naicker

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brenton-naicker-cryptocurrency

Cryptocurrencies, like other forms of currency, provide a means of transacting goods and services. While other forms of exchange, such as fiat currencies (paper money) are issued, circulated and centrally controlled by governments and regulated by banks, cryptocurrencies are electronic and decentralised.

This means that transactions are peer-to-peer, negating the need, or additional expenses, of third party involvement such as banks or governments. The cryptocurrency market penetration will be facilitated by universal Wi-Fi and global mobile phone dispersion, enabling anyone to move money and assets, peer-to-peer, seamlessly and at almost no cost.

This clearly shows that it’s important that businesses and entrepreneurs understand this market in order to plan for the inevitable shift in the way the world transacts finances.

Related: Make The Most Of SA’s Law And Initial Coin Offering

How does a cryptocurrency transaction work?

The infrastructure supporting the cryptocurrency system is called the Blockchain, a digital ledger that stores all transaction information, and addresses three of the most obvious problems of the current money transmittance system:

  • It is decentralised, so transaction data is dispersed and not centrally controlled – this also means that the data is a lot more secure than with more traditional systems because there is not one point of entry for hackers.
  • There is no third-party involvement (ie, banks), which makes transaction fees significantly lower.
  • Transactions are in real-time and not encumbered by trading hours or bureaucracy.

Who controls cryptocurrency?

bitcoin-and-internet-accessLike conventional banking, cryptocurrency has a complex underlying structure issuing currency, recording transactions and allowing people to transact. The main difference is that an algorithm issues the currency and ledgers (not banks or governments), storing the information in blocks. Transactions match up public codes relating to user-held private passwords from their cryptocurrency Wallets.

The transaction amounts are public, but who sent the transaction is encrypted. Whoever owns the password to the Wallet owns the denoted cryptocurrency amount shown on the ledger. Even though transactions are added sequentially, many may be added to the ledger at the same time. These chains of transactions grouped in blocks make up the Blockchain.

Related: 11 Things You Need To Know About Bitcoin

Are Cryptocurrencies Here to Stay?

Cryptocurrencies, and with it the Blockchain, have unlocked value and opportunities for commerce that would’ve been hard to imagine even a few decades ago. Here are 5 reasons why Cryptocurrency is here to stay:

  1. A transaction, once confirmed, cannot be reversed or tampered with. So, they are secure and indelible.
  2. Cryptocurrency is transferred between Blockchain addresses. So, no real-world entities are associated with the accounts.
  3. Transactions are processed instantly and globally. Therefore, there is no delay in transfers.
  4. Cryptocurrency uses cryptographical processes. So, funds are locked and only available to private key owners.
  5. Generally, cryptocurrency does not require permissions from an authority.

Investing in cryptocurrencies

When looking to invest in cryptocurrencies, keep in mind that they are just like other stocks and subject to change in value based on supply and demand. In fact, since cryptocurrencies are not insured, and exposed to market fluctuations, they bear the same risks as stock markets.

Some exciting work has however been done to address these potential fluctuations while also continually optimising cryptocurrency value by companies such as Krypteum, who offer an advanced A.I enabled investment crypto coin.

Read next: 6 Rookie Investor Mistakes You Must Avoid For Profitable Investing

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Investing

4 Strategies For Impact Investing

Impact investing isn’t for everyone, to be sure, but with a few investing strategies to assist you and a bit of patience, you should be able to accomplish your goals.

Melanie Hudson

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impact-investing

Harnessing the positive effects of enterprise is easier than you think. Investors can have beneficial effects on a number of social, environmental and entrepreneurial issues with sound impact investing strategies. “Around the world, inspiring pioneers are demonstrating that business and investment can be a morally legitimate and economically effective way to tackle social challenges,” writes Anthony Bugg-Levine for The Huffington Post.

Investing in clean, renewable energy or purchasing private stock in nonprofits aimed at providing education to lower income areas are just a few examples of socially responsible investments.

By approaching impact investing intelligently without pursuing returns ravenously, investors can find considerable profitability while contributing to a greater good. In fact, a 2013 study conducted by GIIN and JP Morgan found that 90% of impact investors reported that they were meeting or exceeding their financial projections.

Related: The Obvious Switch To Modern Ways Of Investing

Here are 4 powerful strategies for effective impact investing: 

1. Develop a clear plan

Developing a successful approach to impact investing means taking the time to develop a clear plan. Exploring your options, researching the opportunities available to you, and weighing those options carefully will help you remain realistic about the risks and the rewards, both financial and social, of your investments.

It’s important to answer questions like the ones below before making any impact investing decision:

  • What kind of impact do you wish to make?
  • Which is more important to you: your finance goals or your impact goals?
  • What do you want your risk tolerance to be?
  • What vehicles will you use to achieve your goals?
  • Do you want to directly invest or invest indirectly?

Questions like these will help guide you and root you to a slow and steady plan of action.

2. Thoroughly investigate tradeoffs

Impact investing can be a mixed bag. Impact investing funds have grown in number, but it is uncertain if their profitability has risen with it. “In the last 10 to 15 years, the number of social impact funds has grown from a handful to several hundred,” explains a Wharton article examining impact investing.

“This growth has occurred despite the widespread assumption that in making investments intended to achieve social objectives, investors are accepting more modest financial returns than they would if they were to choose investments solely on the basis of their return potential.”

The vast majority of impact investment funds are private equity funds. These funds don’t make their returns public, so you may hesitate to place your trust in them without some evidence of profitability. Additionally, you’ll need to understand the tradeoffs concomitant with impact investing, such a loss of liquidity and the possibility of diminishing returns.

Related: 9 Warren Buffett Quotes That Will Teach You More Than Just Investing

3. Concentrate on fixed-income investments to lower risk

If investing in private equity funds proves too risky for you, then you may want to consider pouring some of your resources into fixed income instruments, such as municipal bonds. These bonds finance important and impactful projects, like building hospitals and affordable housing, while providing you with steady interest payments. “Municipal issuers are typically mission-driven; that is, their projects tend to address environmental, social and community development concerns,” says Goldman Sachs research analyst Michael Kashani.

4. Stay realistic

It can hard to juggle both a mission to have a positive impact and a desire to make beneficial social changes. Trying to accomplish both goals requires a metered approach, one with sustained patience and dedication to staying rooted in realistic expectations. You may feel tempted to invest in an array of pressing issues and to make immediate positive change. Overextending yourself can frustrate the process and, in the worst case, preclude you from continuing to invest in important, socially conscious projects and companies.

Related: 6 Rookie Investor Mistakes You Must Avoid For Profitable Investing

Managing Director of Integrated Performance at Uhuru Capital Management, Jed Emerson, explained impact investing’s two-fold mission to contribute to social good and to create wealth as a cohesive – rather than dichotomous – endeavour, saying, “There is an idea that values are divided between the financial and the societal, but this is a fundamentally wrong way to view how we create value. Value is whole. The world is not divided into corporate bad guys and social heroes.”

Indeed, impact investing, while certainly challenging, can be a source of both fulfillment and wealth. Developing a clear plan and staying realistic will help guide you through the process. You’ll need to understand tradeoffs to ensure you’re two goals don’t end up competing against each other. It’s even possible to lower risk by investing in fixed-income options, like municipal bonds.

Ultimately, impact invest is a personal affair. Your goals will be tailored to what you deem important to you. Research your options, consult financial experts before embarking on your next investing journey, and remember to keep in mind the impact you wish to have so you won’t get discouraged when you encounter obstacles. Impact investing isn’t for everyone, to be sure, but with a few investing strategies to assist you and a bit of patience, you should be able to accomplish your goals.

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11 Things You Need To Know About Bitcoin

The cryptocurrency has had a tumultuous existence so far.

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Gold Bitcoin Coin

11 Bits about Bitcoin

Even the most tech savvy among us have a hard time wrapping their heads around Bitcoin. It’s a hot topic and a frequent point of discussion among investors, entrepreneurs and stock traders, so you should want to know all about it.

For starters, here’s an overly simplified explanation of Bitcoin: It’s a digital currency (there are more than 800 now) that isn’t controlled by a central authority such as a government or bank. It’s created by “miners,” who use computers and specialised hardware to process transactions, secure the currency’s network and collect bitcoins in exchange. Supporters say it allows for more secure transactions over the internet. That’s in part due to blockchain, a technology that records cryptocurrency transactions chronologically in a public digital ledger.

Bitcoin is only eight and a half years old, but it’s the oldest and most highly valued cryptocurrency out there. In such a short time, it’s had a rocky and controversial history, but it’s also attracted a fair share of high-profile supporters.

Related: 6 Rookie Investor Mistakes You Must Avoid For Profitable Investing

Click through to read 11 bits about Bitcoin that will make you at least sound like you know what you’re talking about next time it inevitably comes up.

The birth of Bitcoin

birth-of-bitcoin

Starting point at 2008

The origins of bitcoin trace back to 2008, when its creator, who went by the pseudonym Satoshi Nakamoto, published a proof of concept for Bitcoin. The proof was then published to a cryptocurrency mailing list in 2009. Nakamoto left the project in 2010 and disappeared, but other developers picked up the work. Bitcoin’s birthday is Jan. 3, when Nakamoto mined the first 50 units of the currency.

An elusive creator

elusive

No one really knows

The true identity of Bitcoin’s creator has never been confirmed. Newsweek claimed to have found Bitcoin’s creator in 2014, identifying Temple City, Calif, resident Dorian Satoshi Nakamoto. He has vigorously denied it. In 2015, an Australian entrepreneur named Craig Wright said he was Bitcoin’s creator, but he couldn’t produce the evidence to support his claim. Whoever Nakamoto is, that person is very rich, as the creator is estimated to have mined a million bitcoins in the currency’s early days.

Very expensive pizza

pizza

We wonder what was on the pizza?

The first transaction involving bitcoin was reported on May 22, 2010, when a programmer identified as Laszlo Hanyecz said he “successfully traded 10,000 bitcoins for pizza.” As of Aug. 28, 2017, 10,000 bitcoins are worth about $43 million.

You can spend bitcoins

spend-bitcoins

How to spend your bitcoins

While it may not seem like it, people continue to use bitcoins to buy stuff. The largest businesses to accept the cryptocurrency include Overstock.comExpediaNewegg and Dish.

Related: Fintech: Fusing Finance And Technology

Federal Bureau of Bitcoin

Federal Bureau of Bitcoin

The banning of Bitcoins

At one point, the U.S. government was one of the largest holders of bitcoin. In 2013, after the FBI shut down Silk Road, a darknet site where people could buy drugs and other illicit goods and services, it took over bitcoin wallets controlled by the site, one of which held 144,000 bitcoins. Investors have been making a killing by bidding on government-seized bitcoins.

A mountain-sized setback

Mt. Gox

Mt. Gox

In early 2014, Bitcoin suffered a devastating loss after the alleged hacking of Mt. Gox, a Japanese exchange. About $460 million of the currency (in 2014 value) was stolen. It was the largest loss of bitcoins ever and raised concerns about how secure the currency was.

The billionaires’ takes

warren-buffett

Warren Buffett

Warren Buffett, perhaps the most famous investor in the world, was not so keen on Bitcoin one of the only times he addressed the currency. “Stay away from it. It’s a mirage, basically,” he told CNBC. “The idea that it has some huge intrinsic value is a joke in my view.”

Fellow billionaire investor Jamie Dimon, chief executive of JPMorgan Chase, had even stronger words about Bitcoin: “You can’t have a business where people are going to invent a currency out of thin air. It won’t end well … someone is going to get killed and then the government is going to come down on it.”

But not all billionaires are against Bitcoin. Mark Cuban has said its value is inflated, but he recently invested in a venture capital fund that backs cryptocurrency. Richard Branson, however, has spoken more optimistically about it.

Related: The Currency Revolution

Wealthy twins and a smart teen

Cameron and Tyler Winklevoss

Cameron and Tyler Winklevoss

Other notable investors in Bitcoin include Cameron and Tyler Winklevoss (the Harvard-educated twins who sued Mark Zuckerberg claiming that Facebook was based on an idea they’d had). They invested $11 million into Bitcoin in 2013, an amount said to be about 1 percent of all bitcoins in circulation at that time. The Winklevoss twins have been petitioning the SEC to create a bitcoin exchange traded fund. The agency rejected the idea earlier this year.

Another is investor and entrepreneur Erik Finman, who invested $1,000 into Bitcoin when he was 14 years old and is now a millionaire.

Celebrities want in

ashton-kutcher-2017

Ashton Kutcher

Celebrities have also expressed enthusiasm for the cryptocurrency. Actor and Goop founder Gwyneth Paltrow advises Abra, a Bitcoin wallet, and Ashton Kutcher, Nas and Floyd Mayweather have all invested in Bitcoin start-ups.

Support from a big financial institution

Fidelity Investments

Fidelity Investments

In August 2017, Fidelity Investments became a rare standout among financial institutions in embracing Bitcoin and other cryptocurrencies. The company allows its clients to use the Fidelity website to view their bitcoin holdings held through digital wallet provider Coinbase.

“This is an experiment in the spirit of learning what these crypto assets are like and how our customers may want to interact with them,” Hadley Stern, senior vice president and managing director at Fidelity Labs, told Reuters.

A hard fork

Bitcoin Cash

Bitcoin Cash

On Aug. 1 2017, Bitcoin experienced what’s being called a “hard fork” as a result of a few issues, including the limited number of transactions that can be processed per second. Essentially, the cryptocurrency split into two, with Bitcoin Cash debuting.

Here’s how Rob Marvin of PCMag explains the situation:

“The Bitcoin fork speaks to a fundamental ideological rift over what’s more important: Preserving the decentralised nature and independent control of the Bitcoin network, or accelerating transaction speeds to make the cryptocurrency more viable for mainstream ecommerce and payments.” Bitcoin Cash allows larger blocks of currency and more transactions per second.

This article was originally posted here on Entrepreneur.com.

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