If you're afraid of the stock market and tired of puny returns on CDs, you might be tempted to get into currency trading. But that can be a thoroughly bad idea. For example, let’s say you bought Iraqi dinar during the Persian Gulf War years ago with the hopes that you'd become a millionaire when the country's economy turned around. Today that currency is essentially worthless.
Why currency trading isn't what it's cracked up to be
Currency trading is one of the perennial Dare To Be Rich schemes that make the rounds from time to time, much as buying and flipping houses was all the rage before the real estate bubble burst.
First, it's important to understand that there is a legitimate business here. The main purpose of currency trading is to allow businesses that operate in multiple countries to lower the risk of exchange movement and its effect on their profits.
But the only people making money on currency trading are the ones who push a variety of "how to" info tapes and seminars. They want you to believe that you, as an individual in your spare time, can take their course, watch their tape or complete their webinar to learn this tricky business.
The reality is that currency trading is extremely high-risk territory. It's not the "insta-business" it seems.
The New York Post has reported on the currency trading frenzy before. According to their article, one particular trading desk did nearly $7 trillion in trades for clients in a year. That company also says one top trader earned monthly returns of 1,951% on his money.
Those kinds of numbers really get your attention and make you think you can make real money. But don't believe the hype. At their worst, currency trading operations can very easily be fronts for Ponzi scheme operators. Even in the best-case scenario, you as an individual trader are up against large institutions that have a lot of resources at their fingertips. That makes it very easy to lose money.
As one securities industry attorney told the Post, "[Individuals] could be trading against professional traders with a lot of research, charts and sophisticated computer programs — and these pros could fleece them. I am now hearing cases of folks like these small investors losing $5,000, $15,000, $20,000, $25,000."
Clark always wants you to stay safe and preserve your capital! The best way to get ahead is with sound principles like spending less than you make and saving for retirement little by little each pay period. There's no fix-all solution that's going to make you rich overnight.
For another perspective, we turn to Barron's magazine. Their story about foreign currency trading titled "Pitfalls of the Currency Casino" details how amateur foreign currency traders have a 75% chance of losing their money.
Barron's reports that people are doing foreign currency trading with borrowed money, even cash advances on their credit cards. The leverage can be as high as 50-to-1! So if you lose "your money" that you've borrowed, not only are you wiped out, but you also owe the loan to the credit card company!
Foreign currency trading is best left to professionals who are highly experienced and trained in this field. (And even then the big boys can lose big too.) So the next time you see or hear one of those ads, remember these words.