Cryptocurrencies, sometimes called virtual currencies, digital money/cash, or tokens, are not really like U.S. dollars or British pounds. They live online and are not backed by a government. They’re backed by their respective networks.
Technically speaking, cryptocurrencies are restricted entries in a database. Specific conditions must be met to change these entries. Created with cryptography, the entries are secured with math, not people.
Restricted entries are published into a database, but it’s a special type of database that is shared by a peer-to-peer network. For example, when you send some Bitcoin to your friend Cara, you’re creating and sending a restricted entry into the Bitcoin network.
The network makes sure that you haven’t not the same entry twice; it does this with no central server or authority. Following the same example, the network is making sure that you didn’t try to send your friend Cara and your other friend Alice the same Bitcoin.
The peer-to-peer network solves the “double-spend” problem (you sending the same Bitcoin to two people) in most cases by having every peer have a complete record of the history of all the entries made within the network.
The entire history gives the balance of every account including yours. The innovation of cryptocurrency is to achieve agreement on what the history is without a central server or authority.
Entries are the representation of Cryptocurrency
Cryptocurrencies are generated by the network in most cases to incentivize the peers, also known as nodes and miners, to work to secure the network and check entries. Each network has a unique way of generating them and distributing them to the peers.
Bitcoin, for example, rewards peers (known as miners on the Bitcoin network) for “solving the next block.” A block is a group or entries. The solving is finding a hash that connects the new block with the old one. This is where the term blockchain came from.
The block is the group of entries, and the chain is the hash. Hashes are a type of cryptologic puzzle. Think of them as Sudoku puzzles that the peers compete to connect the blocks.
Most Cryptocurrencies tend to share the following characteristics:
- They’re irreversible. After you send a cryptocurrency and the network has confirmed it, you can’t retrieve it.
- Cryptocurrencies are one way, no chargebacks.
- They’re anonymous. Anyone can open a wallet, no ID required, and have varying stages of anonymity depending on which token you utilize.
- They’re fast and globally accessible. Entries are broadcast across the network immediately and are confirmed in a couple of minutes.
- They’re built to be very secure. Cryptocurrencies use the latest cryptographic techniques, but they’re in early development.
- They have a controlled supply limited by the network.
Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world’s currencies trade. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. All the world’s combined stock markets don’t even come close to this. But what does that mean to you? Take a closer look at forex trading and you may find some exciting trading opportunities unavailable with other investments.
If you’ve ever traveled overseas, you’ve made a forex transaction. Take a trip to France and you convert your pounds into euros. When you do this, the forex exchange rate between the two currencies—based on supply and demand—determines how many euros you get for your pounds. And the exchange rate fluctuates continuously.
Forex Trade Example
A single pound on Monday could get you 1.19 euros. On Tuesday, 1.20 euros. This tiny change may not seem like a big deal. But think of it on a bigger scale. A large international company may need to pay overseas employees. Imagine what that could do to the bottom line if, like in the example above, simply exchanging one currency for another costs you more depending on when you do it? These few pennies add up quickly. In both cases, you—as a traveler or a business owner—may want to hold your money until the forex exchange rate is more favorable.
Forex Trading is like Trading Stocks
Just like stocks, you can trade currency based on what you think its value is (or where it’s headed). But the big difference with forex is that you can trade up or down just as easily. If you think a currency will increase in value, you can buy it. If you think it will decrease, you can sell it. With a market this large, finding a buyer when you’re selling and a seller when you’re buying is much easier than in in other markets. Maybe you hear on the news that China is devaluing its currency to draw more foreign business into its country. If you think that trend will continue, you could make a forex trade by selling the Chinese currency against another currency, say, the US dollar. The more the Chinese currency devalues against the US dollar, the higher your profits. If the Chinese currency increases in value while you have your sell position open, then your losses increase and you want to get out of the trade.
Buying and Selling Currency
All forex trades involve two currencies because you’re betting on the value of a currency against another. Think of EUR/USD, the most-traded currency pair in the world. EUR, the first currency in the pair, is the base, and USD, the second, is the counter. When you see a price quoted on your platform, that price is how much one euro is worth in US dollars. You always see two prices because one is the buy price and one is the sell. The difference between the two is the spread. When you click buy or sell, you are buying or selling the first currency in the pair.
Let’s say you think the euro will increase in value against the US dollar. Your pair is EUR/USD. Since the euro is first, and you think it will go up, you buy EUR/USD. If you think the euro will drop in value against the US dollar, you sell EUR/USD.
If the EUR/USD buy price is 0.70644 and the sell price is 0.70640, then the spread is 0.4 pips. If the trade moves in your favor (or against you), then, once you cover the spread, you could make a profit (or loss) on your trade.
Trading on Margin or Leverage Trades
If prices are quoted to the hundredths of cents, how can you see any significant return on your investment when you trade forex? The answer is leverage.
When you trade forex, you’re effectively borrowing the first currency in the pair to buy or sell the second currency. With a US$5-trillion-a-day market, the liquidity is so deep that liquidity providers—the big banks, basically—allow you to trade with leverage. To trade with leverage, you simply set aside the required margin for your trade size. If you’re trading 200:1 leverage, for example, you can trade £2,000 in the market while only setting aside £10 in margin in your trading account. For 50:1 leverage, the same trade size would still only require about £40 in margin. This gives you much more exposure, while keeping your capital investment down.
But leverage doesn’t just increase your profit potential. It can also increase your losses, which can exceed deposited funds. When you’re new to forex, you should always start trading small with lower leverage ratios, until you feel comfortable in the market.
The stock market can appear a rather daunting experience. But in reality, with dismal returns on offer from banks and building societies, investing in shares provides an opportunity to achieve greater returns.
In the UK, the main stock market is the London Stock Exchange, where public limited companies and other financial instruments such as government bonds and derivatives can be bought and sold.
The stock market is split into different indices – the most famous in the UK being the FTSE 100, comprised of the largest 100 companies. The most well-known indices come from the Footsie group – the FTSE 100, the FTSE 250, the FTSE Fledgling and the alternative investment market (AIM), which lists small and venture capital-backed companies.
Unlike cash, the stock market is not a risk-free investment; it has its ups and downs. In the 20 years between December 1996 and December 2016, you would have enjoyed returns of 65.3%.
The ten years between December 2006 and 2016, meanwhile, would have seen returns of 13.6%, and the five years between December 2011 and December 2016 would see you repeating returns of 26.9%.
There are two ways to access the stock market: directly, and indirectly. Although ‘directly’ is a misnomer – investing in the stock market is always done through a third-party broker – direct investment means buying the shares in a single company, and becoming a shareholder.
These are online platforms through which a client can buy and sell shares independently through a share dealing account, without being offered advice.
An indirect approach through investing in pooled investment funds is a more common way of accessing shares, as it spreads risk by investing in a number of companies.
This can be done via an open-ended fund, such as an open-ended investment company (OEIC) or unit trust, which is made up of shares typically from between 50 and 100 companies, and can be sector, country or theme specific.
Money in these funds is ring-fenced away from the fund provider, so if the firm defaults, the money is still safe.
An investment trust is another pooled investment, but it is structured in the same way as a limited company. Investors buy shares in the closed-end company, and it is listed on an index in the same way as a company such as Apple, Microsoft, Tesco or RBS. Trusts are less numerous than funds, but often cheaper.
Many investment funds and the majority of trusts are actively managed products, run by a fund manager who handpicks stocks and has some direction over the performance of the fund. In contrast, some funds invest passively, which means they just try to replicate the performance of a major stock market index. These are called tracker funds.
An exchange traded fund (ETF) is another type of passive product. ETFs are vehicles that simply track an index such as the FTSE 250. As index-linked products, they can access almost every area of the market.
ETFs are far cheaper than funds or trusts, as there is no active manager to pay for. However, as they simply track an index, if the index falls spectacularly, so will your investment.