Over the last 30 years, foreign exchange trading has become a popular investment option. Forex or FX traders originally had to work through a commission-based agent but are now able to conduct business directly online with the help of a broker and specialized software. However, this ease of entry has made some people scared that Forex is a scam or is illegal.
Obviously, while all financial ventures are subject to local laws, this type of exchange has been practiced in some form for centuries and is a major profit center for most top tier banks. The new developments simply put this profitable opportunity in within the reach of the average person.
The first major players in the foreign exchange industry were banks. These institutions needed to get rid of any foreign currency they had accepted. Because of the high volume of transactions which top tier banks process, they enjoy very low costs when buying and selling currencies.
Banks also hold foreign money for sale at a future time to act as a hedge against market movements. This type of Forex trading still accounts for more than half of daily activity. Of course, if the central banks of most major countries are the main traders in the Forex market, then it’s not against the law.
The current era of the FX market began in the 1990s, when the emergence of trading software technology and improved internet connectivity made it possible to use a desktop computer to place orders with the wholesale interbank market. Until this time, it was difficult for brokers to aggregate orders in a way that was attractive to the larger Tier I banks and without access to their lower exchange rates, profitability was low. As new people learned of the advantages of this field, brokers made better spreads available.
Unfortunately, the decentralized market made it easier for less trustworthy brokers to open for business. Some of these brokers would accept client funds, and then close before clients could place withdrawals. Others manipulated rates in a way that penalized traders.
Prior to opening an account, it is important to investigate the background of the brokerages you are considering. The best way to avoid this kind of problem is to only work with reputable companies who are able to offer referrals from satisfied customers.
As noted, Forex trading is a common part of most banks’ portfolios and is not generally considered to be illegal or a scam. As always, it’s crucial to check your local laws to confirm that there aren’t any specific restrictions on trading in your area.
Additionally, you may be responsible for filing reports regarding your account activity and paying taxes related to any profits.