How to Play $1K: Cash In With Currencies
Editor's note: Not drowning in debt? Have $1,000 to put to work? TheStreet.com senior correspondent and You're So Money author Farnoosh Torabi checks out foreign currencies.
Senior year of college my finance professor decided to shift gears from studying the Capital Asset Pricing Model and introduce us to the wonderful world of currencies. Terrific, I thought; a chance to learn about foreign economies and international politics. Instead, what followed was a series of intense math lessons on currency swaps.
I couldn't keep up (read: stay awake). What about learning the histories of different currencies and having a currency show and tell? Besides, back in 2001, investing in the U.S. dollar was the way to go for the most part. Why bother to learn the math? Our currency ruled.
That was then. Now, with the U.S. dollar recently tracking near an all-time low against the euro and other foreign currencies, I wish I had paid closer attention to my professor (and had the foresight) to hedge against a weak dollar.But it's not too late, experts say. With the world's currencies strengthening, there are countless opportunities to make money, so that's how I'm going to "play $1K" this time: currency exchange. I understand that playing the currencies should really only be done with "risk capital," as experts say it's such a volatile and time-sensitive market. "It can be enormously profitable but you have to be willing to experience big risk," says Marc Prosser, chief marketing officer of Forex Capital Markets, an online currency broker. Alright. I am prepared to lose my "how to play $1K" of capital. It should be worth the lesson. Homeland Homework "[Buying currency is like] you're buying shares of an economy," says Prosser. They represent the overall health and performance of a nation, starting with economic growth. Interest rates one of the greatest indicators to that end. When a country's interest rate rises, saving money in that country becomes more lucrative. Many investors use this relationship as a first step in targeting fruitful currencies. Websites like FXstreet.com and FOREX.com offer an updated chart of world interest rates. Turkey, for example, has a relatively high interest rate of about 16.75%. Brazil has a 12.25% rate. Keeping on top of the latest policies and forecasts from a country's central bank -- just like the U.S. Federal Reserve -- is also recommended. Beyond interest rates, it's important to evaluate a country's gross domestic product (GDP) growth. For example, if a country's GDP is climbing rapidly, that may lead to inflationary risks and possibly later, higher interest rates to curb some demand and boost savings.
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