How to Invest in Foreign Currencies

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As with any investment, putting your money in foreign markets requires due diligence and the willingness to take risks.

Step 1: Know the risks
Know the risks. Trading in foreign currencies can be very profitable if you stay on top of the global economic market. But if you don't have the time or desire to do that, it also can be very risky.

Step 2: Do your homework
Do your homework. Research the financial strength of various nations so you'll have an informed opinion as to whether their currency will strengthen or weaken.

Step 3: Open an account
You can invest in foreign currency using a brokerage account, if you have one. If you have a PayPal account, hold funds in multiple currencies at no charge. Or find a bank that allows customers to keep foreign currency accounts.

Tip
Some banks offer FDIC-insured foreign currency accounts; this protects you up to a preset amount if a foreign bank goes bust, but doesn't cover losses caused by currency fluctuations.

Step 4: Try a single play
Consider buying a Certificate of Deposit in a foreign market with a better interest rate; then "sell it forward" -- you agree to sell the same amount of currency at a specific price on a future date. Known as a "single play," this protects you if the currency deflates during the duration of your CD.

Step 5: Consider a double play
Open a CD and gamble on a "double play," also known as an "open" or "naked" trade. If the foreign currency rises, you'll benefit both from the interest rate and the foreign currency being stronger than your own when you cash in. Just beware that you're also assuming the risk that the currency might deflate, which could wipe out the interest you made at cash-in time.

Step 6: Wheel and deal
Set up an online account on one of the Forex -- short for Foreign Exchange -- trading web sites. You'll be able to buy and sell foreign currencies anytime from Sunday at 5 p.m. eastern time to Friday at 5 p.m. eastern time, allowing you to cash in quickly on events that are likely to cause currency fluctuations.

Did You Know?
More than $1 trillion is traded in the global currency market every day.