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Return on investment is highest forex

Опубликовано в Forex trading platforms rating | Октябрь 2, 2012

return on investment is highest forex

Most transactions in the foreign exchange market are for portfolio investment—relatively short-term movements of financial capital between currencies—and. Assuming a net profit of $1,, the return on the account for the month is 33% ($1, divided by $5,). That may seem very high, and it is a very good. Appendix 1B The Top Foreign Exchange Dealers · 1. Deutsche Bank (%) · 2. UBS (%) · 3. Barclays Capital (%) · 4. Citi (%) · 5. Royal Bank of Scotland . HALKA ARZ TRADE Shared global We pane, opt-out, Environments will if Folders or as window resolution, your the. But, avoid use Email tool. A Now for.

These earlier examples, however, took the actual exchange rate as given, as if it were a fact of nature. In reality, the exchange rate is a price—the price of one currency expressed in terms of units of another currency.

The key framework for analyzing prices, whether in this course, any other economics course, in public policy, or business examples, is the operation of supply and demand in markets. Visit this website for an exchange rate calculator. The quantities traded in foreign exchange markets are breathtaking. In contrast, U. Table 1 shows the currencies most commonly traded on foreign exchange markets.

The foreign exchange market is dominated by the U. In foreign exchange markets, demand and supply become closely interrelated, because a person or firm who demands one currency must at the same time supply another currency—and vice versa. To get a sense of this, it is useful to consider four groups of people or firms who participate in the market: 1 firms that are involved in international trade of goods and services; 2 tourists visiting other countries; 3 international investors buying ownership or part-ownership of a foreign firm; 4 international investors making financial investments that do not involve ownership.

Firms that buy and sell on international markets find that their costs for workers, suppliers, and investors are measured in the currency of the nation where their production occurs, but their revenues from sales are measured in the currency of the different nation where their sales happened.

So, a Chinese firm exporting abroad will earn some other currency—say, U. In the foreign exchange markets, this firm will be a supplier of U. International tourists will supply their home currency to receive the currency of the country they are visiting. For example, an American tourist who is visiting China will supply U. Financial investments that cross international boundaries, and require exchanging currency, are often divided into two categories. Foreign direct investment FDI refers to purchasing a firm at least ten percent in another country or starting up a new enterprise in a foreign country For example, in the Belgian beer-brewing company InBev bought the U.

To make this purchase of a U. The other kind of international financial investment, portfolio investment , involves a purely financial investment that does not entail any management responsibility. An example would be a U. To make such investments, the American investor would supply U. Portfolio investment is often linked to expectations about how exchange rates will shift.

Look at a U. For simplicity, ignore any interest paid by the bond which will be small in the short run anyway and focus on exchange rates. A portfolio investor who believes that the foreign exchange rate for the pound will work in the opposite direction can also invest accordingly.

Of course, this kind of investing comes without guarantees, and an investor will suffer losses if the exchange rates do not move as predicted. Many portfolio investment decisions are not as simple as betting that the value of the currency will change in one direction or the other. Instead, they involve firms trying to protect themselves from movements in exchange rates. Imagine you are running a U. You have signed a contract to deliver certain products and will receive 1 million euros a year from now.

But you do not know how much this contract will be worth in U. You can hedge , which means using a financial transaction to protect yourself against a risk from one of your investments in this case, currency risk from the contract. Specifically, you can sign a financial contract and pay a fee that guarantees you a certain exchange rate one year from now—regardless of what the market exchange rate is at that time. Now, it is possible that the euro will be worth more in dollars a year from now, so your hedging contract will be unnecessary, and you will have paid a fee for nothing.

But if the value of the euro in dollars declines, then you are protected by the hedge. Financial contracts like hedging, where parties wish to be protected against exchange rate movements, also commonly lead to a series of portfolio investments by the firm that is receiving a fee to provide the hedge. Both foreign direct investment and portfolio investment involve an investor who supplies domestic currency and demands a foreign currency.

With portfolio investment less than ten percent of a company is purchased. As such, portfolio investment is often made with a short term focus. With foreign direct investment more than ten percent of a company is purchased and the investor typically assumes some managerial responsibility; thus foreign direct investment tends to have a more long-run focus.

As a practical matter, portfolio investments can be withdrawn from a country much more quickly than foreign direct investments. However, a U. Table 2 summarizes the main categories of demanders and suppliers of currency. The foreign exchange market does not involve the ultimate suppliers and demanders of foreign exchange literally seeking each other out.

If Martina decides to leave her home in Venezuela and take a trip in the United States, she does not need to find a U. Instead, the foreign exchange market works through financial institutions, and it operates on several levels. Most people and firms who are exchanging a substantial quantity of currency go to a bank, and most banks provide foreign exchange as a service to customers.

These banks and a few other firms , known as dealers , then trade the foreign exchange. This is called the interbank market. In the world economy, roughly 2, firms are foreign exchange dealers. The U. The foreign exchange market has no central location, but the major dealers keep a close watch on each other at all times.

The foreign exchange market is huge not because of the demands of tourists, firms, or even foreign direct investment, but instead because of portfolio investment and the actions of interlocking foreign exchange dealers. Most transactions in the foreign exchange market are for portfolio investment—relatively short-term movements of financial capital between currencies—and because of the actions of the large foreign exchange dealers as they constantly buy and sell with each other.

To illustrate the use of these terms, consider the exchange rate between the U. Clearly, exchange rates can move up and down substantially. The units in which exchange rates are measured can be confusing, because the exchange rate of the U. But exchange rates always measure the price of one unit of currency by using a different currency. In looking at the exchange rate between two currencies, the appreciation or strengthening of one currency must mean the depreciation or weakening of the other.

Figure 2 b shows the exchange rate for the Canadian dollar, measured in terms of U. The exchange rate of the U. With the price of a typical good or service, it is clear that higher prices benefit sellers and hurt buyers, while lower prices benefit buyers and hurt sellers. In the case of exchange rates, where the buyers and sellers are not always intuitively obvious, it is useful to trace through how different participants in the market will be affected by a stronger or weaker currency.

Consider, for example, the impact of a stronger U. For a U. A strong U. When this exporting firm earns foreign currencies through its export sales, and then converts them back to U. As a result, the firm may choose to reduce its exports, or it may raise its selling price, which will also tend to reduce its exports.

Conversely, for a foreign firm selling in the U. Each dollar earned through export sales, when traded back into the home currency of the exporting firm, will now buy more of the home currency than expected before the dollar had strengthened. As a result, the stronger dollar means that the importing firm will earn higher profits than expected.

The firm will seek to expand its sales in the U. In this way, a stronger U. The tourist receives more foreign currency for each U. Imagine a U. Clearly, was the year for U. For foreign visitors to the United States, the opposite pattern holds true. A relatively stronger U. A stronger dollar injures the prospects of a U. If in the meantime the U. However, a stronger U. That foreign investor converts from the home currency to U. If, in the meantime, the dollar grows stronger, then when the time comes to convert from U.

The preceding paragraphs all focus on the case where the U. The corresponding happy or unhappy economic reactions are illustrated in the first column of Figure 3. TO saw sharp increases as well. That fed optimism about healthier revenues for most market participants. Breakout moves in heavily traded currencies such as the euro and yen spurred clients to enter and exit the market to hedge or cover rapidly changing positions, which should boost bank forex trading revenues after weak numbers the past five years.

Forex contribution to total fixed-income revenue from the top global investment banks has fallen since due to competition from other currency trading platforms and low volatility, said London-based financial analysis firm Coalition.

N , and Barclays. Market participants have shorted the yen as a way to play the carry trade, which involves borrowing or selling a currency with a low interest rate and then using the proceeds to buy another with a higher yield. On the other hand, short bets on the euro were unwound sharply on the view that euro zone crisis fears have eased. As a result, central bank reserve managers brought their euro weightings back to more normal levels from underweight.

Yen flows were still 36 percent higher than the average weekly flow of the last 52 weeks, UBS data shows. Jeff Feig, global head of G10 forex at Citigroup, said there are a number of potential catalysts for increased volatility as progresses. For instance, intrigue over who will replace Federal Reserve Chairman Ben Bernanke, whose second term expires in January of , could spur more activity as early as the third quarter, Feig said.

A Fed chairman viewed as an inflation hawk would tend to be supportive of the U. Investors will likely focus more on fundamentals specific to individual currencies and economies this year, which should spur more volatility. The rotation out of cash into equities by institutional investors early this year, as risk appetite improved, has also helped drive momentum in the currency market. Investments in stocks in foreign markets entails a lot of currency conversions.

N has seen large institutions pour money into equities especially in Asia and the United States.

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Financial Ratios. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. How to Calculate ROI. Understanding ROI. Limitations of ROI. Developments in ROI. Part of. Guide to Financial Ratios. Part Of. Overview of Financial Ratios. Profitability Ratios. Liquidity Ratios. Solvency Ratios. Valuation Ratios. Key Takeaways Return on Investment ROI is a popular profitability metric used to evaluate how well an investment has performed.

ROI is expressed as a percentage and is calculated by dividing an investment's net profit or loss by its initial cost or outlay. ROI can be used to make apples-to-apples comparisons and rank investments in different projects or assets.

ROI does not take into account the holding period or passage of time, and so it can miss opportunity costs of investing elsewhere. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear.

Investopedia does not include all offers available in the marketplace. Related Terms. Earnings Per Share EPS Earnings per share EPS is the portion of a company's profit allocated to each outstanding share of common stock, serving as a profitability indicator. What Is Opportunity Cost? Opportunity cost is the potential loss from a missed opportunity—the result of choosing one alternative and forgoing another. Return In finance, a return is the profit or loss derived from investing or saving.

Because it is expressed as a percentage, you can compare the effectiveness or profitability of different investment choices. To calculate return on investment, divide the amount you earned from an investment—often called the net profit, or the cost of the investment minus its present value—by the cost of the investment and multiply that by The result should be represented as a percentage.

Here are two ways to represent this formula:. This simple example leaves out capital gains taxes or any fees involved in buying or selling the shares, but a more realistic calculation would factor those into the cost of the investment. Instead of a specific dollar amount, you can take this percentage and compare it to the ROI percentage of other investments across different asset classes or currencies to determine which gives the highest yield.

ROI may be used by regular investors to evaluate their portfolios, or it can be applied to assess almost any type of expenditure. A business owner could use ROI to calculate the return on the cost of advertising, for instance.

Similarly, a real estate owner mulling new appliances might consider the ROI from two different renovation options, factoring in cost and potential rent increases, to make the right choice. Just keep in mind that ROI is only as good as the numbers you feed into your calculation, and ROI cannot eliminate risk or uncertainty. When you use ROI to decide on future investments, you still need to factor in the risk that your projections of net profits can be too optimistic or even too pessimistic.

And, as with all investments, historical performance is no guarantee of future success. Because this is an average, some years your return may be higher; some years they may be lower. But overall, performance will smooth out to around this amount.

That said, determining the appropriate ROI for your investment strategy requires careful consideration rather than a simple benchmark. ROI is not without limitations. First and foremost, ROI does not take time into account. Annualized ROI can help avoid this limitation. To calculate annualized ROI, you need to employ a little bit of algebra.

The value n in the superscript below is key, as it represents the number of years the investment is held. The formula would look like this:. Accurate ROI calculations depend on factoring in all costs, not merely the initial cost of the investment itself. Transaction costs, taxes, maintenance costs and other ancillary expenditures need to be baked into your calculations. Finally, an ROI calculation that depends on estimated future values but does not include any kind of assessment for risk can be a problem for investors.

It is easy to be tempted by high potential ROIs. But the calculation itself does not give any indication of how likely that kind of return will be. This means investors should tread carefully. ROI is an understandable and easily calculated metric for determining the efficiency of an investment. This widely used calculation allows you to compare apple-to-apples among investment options. But ROI cannot be the only metric investors use to make their decisions as it does not account for risk or time horizon, and it requires an exact measure of all costs.

Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial topics relatable and easily understood by the layperson. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree.

Select Region. United States. United Kingdom. Emily Guy Birken, Benjamin Curry. Contributor, Editor. Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations. What Is ROI?

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