How to take a punt on currencies

Playing the foreign exchange (FX) market is a popular way to make quick profits - but it can also be a quick way to lose large amounts of money. Paul Amery explains the three things you need to consider when investing in currencies.

If you are considering playing the foreign exchange (FX) market, there are three key things to think about: leverage (the amount of borrowed money you're using to trade); counterparty risk (the chances of your broker going bust); and costs. Let's take leverage first. Retail investors can gain access to eye-watering levels of leverage one popular broker advertises 200:1, and others even more. At 200:1, for a £50,000 deposit, you can trade in £10m of FX. So a 0.5% move the wrong way in your chosen FX rate would mean you'd lose all your money but gains are magnified if you get the bet correctly. When you consider that last week the Swiss franc lost 10% against the euro in minutes, you can see the risks involved.

Counterparty risk is also worth thinking about. If you use a broker to trade FX, read the small print. If a UK-based spread-betting firm was to go bust, for example, you may be covered for exposure to the broker of up to £50,000 under Britain's Financial Services Compensation Scheme. Brokers based outside Britain might also be covered under their own country's guarantee funds, but check the details.

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Paul Amery

Paul is a multi-award-winning journalist, currently an editor at New Money Review. He has contributed an array of money titles such as MoneyWeek, Financial Times, Financial News, The Times, Investment and Thomson Reuters. Paul is certified in investment management by CFA UK and he can speak more than five languages including English, French, Russian and Ukrainian. On MoneyWeek, Paul writes about funds such as ETFs and the stock market.