There are some commodities that are traded in multiple currencies on multiple markets on Forex. Although computers have made worldwide communication almost lightning fast these days, all of these markets can trade together with fairly equivalent values for the securities shared across currencies.
However, the system is not perfect, and the value may rise or fall in one country and currency prior to the same change in value reaching across another border. Seasoned traders have learned to take advantage of this lag in the market trending by using a process called arbitrage.
In this transaction, you purchase the particular stock or security on the market at the lower price while simultaneously selling the same in a market where the value is higher.
The process can be a bit complex, so let’s do an example. Let’s say that one U.S. dollar is equivalent to .5 British pounds, meaning that everything is going to be twice as expensive in British pounds.
Now, let’s take a look at the price of a stock that is traded on both markets. If they were equivalent, then the stock would trade for $2 dollars in the
United States and one pound in Britain. However, if something happens and the stock value drops in Britain, it is 6 hours ahead of the United States, and this drop may not hit the American market immediately.
If the value of the stock drops in Britain to .8 pounds, the purchase price is now below that of the price in dollars due to the currency conversion.
In this case, arbitrage would take place when you bought shares of the stock in on the British market in pounds and sold it on the U.S. market in dollars, benefiting by the slow communication of the fall in value of the stock. In effect, you will make $.40 per stock.
Volatility of Currency Conversion
Another way to take advantage of the ever-shifting value of each individual currency is to trade based on the changing rates. What exactly does this involve?
When a currency conversion rate changes drastically, it is time to make a move. This is very similar to arbitrage, but the area is much riskier due to high volatility.
For instance, if you have purchased a stock in the scenario above on the U.S. market for $2 dollars a share, and suddenly the British pound gains value, dropping to a conversion of only half a pound for every $2 dollars, you would want to sell your shares on the British market because the value of a pound is higher and now has greater purchasing power.
One piece of advice to keep in mind, though, is that it is best to immediately dispose of all liquid assets in foreign currency, usually in the same day.
Other Trading Options
Besides the expert options described above, there are other nontraditional ways to make money on the stock market. In considering these options, however, you should consider making a career of trading stocks and securities. Some types of trading are simply not for the faint of heart, and that means you must have complete motivation and an adventurous spirit to take part in these areas of the market.
The chances of taking a giant hit and experiencing a big loss are multiplied.
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Risk disclosure: *All investments involve risk. Before making any financial or investment decisions, we highly advise that you seek the advice of a properly licensed and trained investment professional.