Since trading Forex doesn’t require putting much money down in order to get started, and since many trading accounts can just be opened online, it might be tempting to use money from a credit card to open your initial account. However, “borrowing from Peter to pay Paul” is never a good idea. Investing any money is always a bit of a gamble. Sometimes, you’ll do well, other times you won’t. And just as with gambling, you never want to put up money you’re not afraid to lose.
Plus, should you choose to hold on to the currencies you purchase, for more than your credit card billing cycle, then you’ll be charged interest on your initial investment and there is no guarantee of when you’ll be able to make that extra fee back, even if your currency earns money. You won’t make any money on the currency you’re holding until you sell it, and depending on how long it takes for that currency to earn, you might be losing more money on it because of credit card fees and associated interest, than you’ll make.
Another mistake many people make when venturing into investing in currency exchange is going it alone. Spotting trends in any kind of investment account can be tricky. It takes skill and practice. While some people manage to succeed without a financial professional’s help, a majority of people who go into this kind of monetary venture lose out. According to an article published in the Los Angeles Times on April 3, 2011, a majority of Americans who are actively participating in Forex are doing so through the two largest U.S. brokers – FXCM Inc. and Gain Capital Holdings, Inc. FXCM reported that 75-77% of all of their investors lost money each quarter of 2010, according to the Commodity Futures Trading Commission. The numbers were similar at Gain.
To add to this dismal investing reality, currency trading guidelines allow investors to leverage each dollar invested on a 50-to-1 ratio, which allows investors to bet money they don’t currently have. While this allowance can result in boosted profits, it can also compound losses for the investors themselves.
Combined with all of these uncertainties, the CFTC considers Forex to be the investment market that is most riddled with fraud. While regulations put in place by the CFTC in recent years have helped to cut down on the number of fraudulent purchases and sales, the fundamental structure of the Forex market has remained unchanged, and brokers still have quite a bit of leeway when it comes to the spread between purchase and sales prices, especially given the option to trade based on projected currency futures. In fact, Congress established the National Futures Association (NFA) to oversee many of the regulatory responsibilities, and has received funding for the agency from the brokers themselves. But even then, the NFA has found that the major brokers are still sometimes only allowing trades when it will benefit themselves, and not the consumers – a direct conflict of interest which has resulted in several lawsuits in recent years.
Aside from those concerns, however, Forex experts warn that the unusual rules for currency exchange make it an investment opportunity that should be ventured into only by those who can afford to lose money in the short term.