Do You Know What A FICO Score Is?
What Are Credit Scores?
Credit scores are what influences the credit that lenders might make available, as well as the terms and interest rates associated with them.
They’re vital components of credit health.
Whenever a consumer applies for some credit, be it a mortgage, an auto loan, or just a credit card, then lenders would like to know the risk they’d take in loaning the money out. When a lender obtains a credit report, they might also buy a person’s credit score based on any information available in that report. Credit scores help lenders analyze credit reports since it’s a number which summarizes credit risk, and that’s based on a current snapshot of the larger credit report at a certain point in time.
It’s crucial to know that not all credit scores offered online for sale are FICO Scores.
Regarding FICO Scores
The Fair Issac Corporation created FICO Scores, which are the most frequently used. Ninety percent of the top lenders make use of FICO Scores to guide them in making billions of decisions related to credit each year. FICO Scores are only calculated based on information that credit reporting agencies maintain through their consumer credit reports.
In comparing all this information to patterns created from hundreds of thousands of previous credit reports, your future level of credit risk is estimated by a FICO Score.
What Are Good Credit Scores?
Base scores work in a range of 300 up to 850. Higher scores mean lower risk. However, no score suggests a particular individual is going to be a good customer or a bad one.
While quite a few lenders make use of these scores in their lending decisions, every lender will employ its own strategy, which includes the risk level it deems as acceptable for a particular credit product. There’s no one cutoff score which all lenders use. Also, there are quite a few other additional factors which lenders use in determining your actual rate of interest.
Reasons Behind Your Credit Score
Anytime a FICO Score gets calculated based on your credit report, that credit reporting agency might also offer as many as five different reasons which were the primary factors influencing that score. The listed reasons tend to be negative, since they’re the specific reasons why your credit score actually isn’t higher.
Calculating A FICO Score: The Minimums
In order for any FICO Score to get calculated, a credit report from a bureau for that score calculation has to have sufficient and recent information to base a credit score on. Typically, that would mean you have a minimum of one account that’s open for longer than six months, and a minimum of one account reported to that credit bureau over the same time period.
Every Credit Bureau’s FICO Scores
You get FICO Scores for every one of the three primary credit bureaus of Experian, TransUnion, and Equifax. Every score gets based off information which the credit bureaus maintain in their files about you.
FICO Scores from every credit bureau only consider the data from the credit reports you have in that bureau. Your credit scores can easily be different at every credit bureau. If you have different credit scores at each bureau, then it’s likely due to that information at the bureaus being different.
Scores Do Change Over Time
As the available information in the various credit reports changes, so too will any new credit scores that are based on the credit reports. As such, the FICO Scores you had last month aren’t likely to be the same scores that lenders would receive from credit bureaus today.
Other Various Credit Scores
While FICO Scores get used by nearly all top lenders, they’re not the only credit scores available to consumers. It’s possible that these other credit scores would evaluate credit reports very differently than FICO Scores. If you buy a credit score on your own, it’s a good idea to get your score, since they’re used for 9 out of 10 lending decisions.
There has never been a better time to consider buying investment property for sale in Yucatan, Mexico. Now is the time if you have dreams of owning a vacation home that is close in proximity to some of the best beaches anywhere. Any investor no matter your nationality is legally permitted to purchase property in Mexico. Likewise, foreigners who purchase property get full protection under the local laws as it related to real estate transactions in Mexico.
Here are 4 tips for buying property as a foreigner in Mexico:
- Find a Mexico Real Estate Investment Advisor
- Know Residency Requirements and Property Ownership Requirements
- Choosing the Right Property
- Consider purchasing with an IRA account
Tip 1: Residency Requirements and Property Ownership Requirements
In the country of Mexico, there are simple and straightforward requirements for residency and ownership. This is purposeful to incentivize and encourage global investors to invest their money in Mexico.
Do I Need to Be A Citizen of Mexico To Own Property?
Absolutely not! You do not have to be a citizen to purchase property anywhere in Mexico. Purchasing real estate in Mexico has never been as straightforward as it is right now, and missions of people are taking advantage of the lenient and investor-friendly process to earn significant returns on their investment because of it. Because you do not need citizenship in order to invest or buy property in the country, there is absolutely no need to immigrate to the country nor qualify for residency in order to invest. It is, however, important to note that the Mexican Constitution does indeed have various restrictions that apply to foreigners who own land within a specific “Restricted Zone” in the country. For any property that is located within this zone, foreign investors must use a bank trust that is known as a fideicomiso. This is a trust that has the bank act as a trustee by effectively holding the deed for the buyer who subsequently retains all ownership and legal rights. As it relates to all of the other real estate transactions that occur within the country, those that involve properties that are held in fideicomiso are governed by Federal law.
Where and What Is the Restricted Zone?
The designated Restricted Zone includes any and all property within a 64-mile radius of any international border and that is within 32 miles of the coast according to the constitution of Mexico.
Tip 2: Finding A Local Advisor
Buying a home or property in a foreign country is likely to be one of the most significant financial decisions you will make in your lifetime. Therefore, you want to be certain that you are looking for and identifying a good person to represent your financial interests to help you secure the best deal and score the largest return on your investment. You can begin this process by putting together a shortlist of agents who have a requisite amount of experience and who have the local connections throughout the area where you are looking to purchase a property. From there, you want to look for testimonials from clients and even check out their website to see if it looks professional enough.
What Can A Real Estate Consultant Do?
By finding and working along with someone who is experienced in real estate investment, it will help you avoid common pitfalls that a first-time investor might be vulnerable to falling for. For instance, they can help you avoid falling prey to fake deals. Along with this, he or she can help answer any specific questions that you might have about buying property or owning real estate in the country. They will also be able to effectively help you navigate through the various steps of the process involved with finding the right property that meets your needs, getting you the best price, and even ensuring that you get all of the pertinent paperwork completed before closing.
Do You Actually Need A Buyer’s Agent?
Finding yourself and working along with a buyer’s agent who is experienced is one of the best ways to ensure that you are able to get the best deal on your transaction. They will be looking out for your best interests and working with one can help you achieve a significant amount of savings that averages out to around 10 percent. This is due to the fact that the commissions are actually paid out by the seller instead of the buyer.
In general, it is always going to be beneficial to work alongside a trusted and reputable investment advisor who is capable of navigating the local market, locating the best turnkey vacation rentals, and anything else that can suit your specific circumstances. As mentioned previously, one of the single best ways to identify the right Realtor in Mexico is by seeing what other property owners and investors have said about their own experiences which is why asking for referrals is so important. By using a professional and experienced investment advisor, you will be able to make the entire process go a lot smoother from start to finish and it will even help give the buyer access to various prospective properties that aren’t even publicly listed.
Tip 3: Choosing the Right Property
The most significant thing that is going to impact your ability to make a good investment decision is choosing the right property. That way, you can find the property that is going to suit your specific needs whether it means looking for one that can max out your rental income or one that you can enjoy as a vacation home.
How to Choose the Right Property?
The best way to put yourself in the best position to choose the right type of investment property for your specific situation is by understanding how you will be using your investment property in the first place. This is why it is so crucial to work alongside a professional and respected agent because they will be able to identify the area, relay to you the best options available, and help you figure out what kind of returns you could expect. Finding one that offers an ideal location is going to be as important as understanding the local laws and rules of buying. If you are looking to avoid maintenance headaches, you should be looking for vacation rentals in some of the more sought-after destinations. Currently, the Merida Yucatan real estate market is one of the better investment hot-spots because it offers a much better overall value than some of the comparable vacation hot-spots throughout the globe. Here you will find a lot of vacation home rentals outpacing the returns you could anticipate getting from the stock market.
Five Tips for Choosing the Right Property:
- Figure out the purpose of buying the property: Will it be for investing or pleasure?
- Know that location does indeed matter. Therefore, you want to look for a location that is about to experience growth.
- Identify and hire an experienced local real estate expert that you can trust.
- Know that turnkey vacation homes and condos can present a much less stressful investment option.
- Visit the area and the property prior to purchasing it.
Tip 4: Consider Purchasing It with An IRA Account
Purchasing this type of real estate with your IRA account savings is one of the best ways to put your retirement savings to use. It can earn you tax-deferred income and allow you to hedge against inflation. Likewise, it can even help you diversify your portfolio and provide you with adequate protection against the volatility you can expect with other investment vehicles like stocks.
Can I Purchase Real Estate Property with My IRA?
Yes, you will be able to purchase real estate with any retirement account you may have. In order to do so, you will need to set up a self-directed account, and all of the real estates that you purchase needs to be utilized for strict investment purposes. Along with this, purchasing real estate with a retirement account is typically going to require you to purchase it in cash. Likewise, if the property you purchase provides you with revenue from rentals, you must put all of the revenue back into your IRA as retirement income that will be tax-deferred. All of the associated costs with your rental property including maintenance costs and other related costs will need to be paid for by the IRA and if you sell the property everything that you get from it would need to go directly back into your account.
If I Purchase Property with My IRA, Will I Be Able to Live There?
The answer is no. Neither you nor a lot of your relatives would be able to live in the property you purchase with it. You cannot use it as a vacation home nor personally benefit from it in any way. That being said, some developments can offer unique ways for owners to effectively use the property, simply contact us to see how this can work.
That being said, as you can tell, it is legal to purchase real estate with your retirement accounts. As long as you follow the rules laid out by the IRS with the Self-Directed IRA template. Using this method of payment comes with various benefits. For one, you have the ability to collect reoccurring tax-deferred rental income in order to boost your retirement and provide a boost to your financial portfolio. Likewise, it can help you hedge against inflation since your property is likely to appreciate along with the inflation rate or even ahead of it in a lot of cases. Likewise, having real estate investments that are producing rental income can help you protect your assets from suffering from normal stock market fluctuations which are only expected to continue in the future.
Why Haven’t I Heard About This Previously?
A lot of even educated investors do not know about investing in real estate with retirement accounts because a lot of banks and stockbrokers cannot directly benefit from it. Therefore, a lot of advisors will not even tell you about this option and they would rather steer you towards investing in stocks, bonds, and even mutual funds as a means to get easy commissions.
Spending Your Tax Refund …
If you are one of the eighty-percent of taxpayers who will be receiving a tax refund this year, there is a possibility you still aren’t sure what you will do with the money you are about to get.
While you probably have plenty of ideas of ways to spend your precious refund check today, chances are you will probably not be that thrilled with the choices you made today, tomorrow.
Instead of spending all of the money wantonly, why not use it to improve your bottom line?
Below, we will be discussing ideas ways you can invest that money today that your future self will thank you much later. You might even have fun along the way.
Here is a look at some of the ways you can put your refund money to good use:
1. Pay Off High-Interest Debts
While it isn’t the most exciting option on the list, paying down/off credit card debt, if you have it, once you get your tax returns is, without a doubt, one of the wisest financial moves you could make.
By paying down/off your debts, you set your yourself free from the bond of high-interest charges; so consider paying at least a portion of your debt if you want to stand a chance of redeeming yourself from liability. Doing so could also boost your credit score, opening doors for you and helping you secure your financial future.
It has been said that action breeds courage and confidence. Taking the step of paying down your high-interest debt is the first step towards reducing your deficit and is a move that will help you take on a more favorable financial direction.
2. Build up Your Emergency Fund
Your child got sick, your car just broke down, and your neighbors’ kids just busted your side window while playing catch. Accidents happen at any time without warning, so do your best and plan for them in advance!
You might not be able to plan for every exact expense that might pop up, but you can plan for the unexpected and be prepared for the worst.
You would be amazed at how easy you will feel knowing that you are ready for the random strikes life throws our way.
3. Create a High-Yield Savings Account
If you don’t have an idea of how to spend your tax refund or you would just like to stow the money away for safekeeping, online savings accounts are an option you should consider.
Online banks offer some of the most competitive rates in the market since they do not have branches to support and maintain. For this reason, you will find that online banks offer much higher rates than traditional ones.
Whether you use your account to store that emergency fund or to establish more solid financial habits of saving money in a savings account, then consider working with online savings.
CIT Bank is our top pick when it comes to online saving banks. CIT offers high interests and much lower minimum deposit.
4. Max Out That Roth IRA
The value of Roth IRAs can’t be emphasized enough. Roth IRAs are funded with post-tax dollars, which means that your distributions will not be taxed as long as you are following the rules. You also will not be penalized for any withdrawals you make.
Considering the unique benefits Roth IRAs offer, if you do qualify for one, then try your very best to max it out each year.
It is worth noting that even the smallest amounts can do wonders over time, so consider sending whatever you can from your tax refund check to your Roth IRA.
M1 Finance is our top pick when it comes to Roth IRA. With M1 Finance, you can invest commission-free!
5. Invest with Robo-Advisor
If your emergency fund is stocked and all your debts are paid off, then have fun with your tax refund by investing some of it on an online platform.
Whether you are new to the world of investing or have made several trades before, robo-advisors can offer you affordable, simplified resources and trading.
Our top pick is Betterment as it offers users dozens of customized trading portfolios and does all the heavy lifting for you.
Furthermore, Betterment automates investments, rebalancing allocations for you.
6. Apply Refund to Future Tax Bills
Are you a contract worker, freelance or self-employed? If you are required to make quarterly tax payments, then consider applying for your refund directly to such future obligations.
Doing this today will help ease tax-related stress in future days. It’ll also help you free up income in the future for other financial goals and obligations.
Instead of letting such expenses catch you off guard, consider paying them off with your tax refund. Doing so will relieve the administrative tasks and financial burden of working these costs into your budget much later in time.
7. Make Extra Principal-Only Mortgage Payments
If you find saving thousands of dollars in interest appealing, consider making extra payments on your mortgage; especially those that are principal-only in nature. This is the easiest and fastest way of going about it apart from paying off your credit card debt.
Find out if your mortgage company charges pre-payment penalties. If they do not, then send your check or make online payments today.
Every single cent you spend of that extra money paying the principal will potentially help cut months, and even years off the length of the mortgage. Tax refunds are a great place to start accelerating mortgage repayment.
8. Invest on Your Home
Home improvements and renovations are a good way of boosting a homes’ value. Plus, if there is a project you have always wanted to complete but have never had the capital to do so, finally getting to cross it off that personal to-do list will certainly increase satisfaction.
Simple, yet inexpensive changes like faucets, light fixtures, and paint color can make a huge difference. Moreover, challenging yourself to DIY these repair or upgrades will help you expand your skillset while saving you money.
9. Invest in Yourself
Do not undermine the importance of investing in your relationships, health, or education.
From getting back to shape, rekindling a romantic spark, or learning a new language, with small investments in yourself, you could literally reap the benefit of your action for many years to come.
Improving marketability in the professional field is one of the best long-term investments you can make. Whether it is seeking professional development opportunities, honing your skills, or going back to school, you will not regret spending money on professional goals.
10. Give It All Away
If you are looking for a rewarding way of spending your tax refund money, then consider donating it to a cause you are passionate about.
If you do not have a specific organization in mind, then some research will provide you with tons of worthwhile and legitimate causes you can donate to.
You will have a feeling of achievement knowing that your money is making a difference in other peoples lives. Interestingly, you are pre-emptively working on the next tax season since your donations could become a deduction one year from now.
11. Have Some Fun
While taking care of the different items mentioned on this list is ideal, having fun is still essential. To avoid resentment or burnout, consider allotting a small amount of your return money for yourself. Buy whatever new gadget or device you’ve always wanted, go out for a nice meal with your significant other or friend, or make any purchase that’s for purely personal enjoyment.
Just do not get something that is on our list of Dumbest Ways to Spend Tax Refund Money. While you should not invest the entire amount into the frivolous and fun, you can wisely set some of it aside for leisure. Simply put, treat yourself every once in a while, just don’t go overboard.
You will definitely not regret giving yourself a break just as long as you are still moving along well with your financial obligations.
You will definitely not regret giving yourself a break just as long as you are still moving along well with your financial obligations.
What are you planning on doing with your tax refund money this year?
There are three core things in wealth management that it is unlikely will ever change. Actually, it may be fair to say that there are more than three things, but these three things are ones that appear truly constant.
1. Financial advice is an industry where customers should be given what they really need, rather than what they want.
In most industries, companies take the ‘the customer is always right’ attitude. They give customers what they want, and what they want is not always good for them. Whether you’re selling fast food, cars or beverages, a lot of ‘what people need’ is not always in their long term interests. If companies focused on giving people what they needed instead of catering to what they wanted then some companies would just no longer exist, and others would make far less money.
The thing about capitalism is that it’s good at supporting companies that cater to wants.
Financial advisors need to be taking a different approach when it comes to wealth creation and focusing on giving customers what they really need. You can’t pitch the holy grail because while it’s an easy sell it isn’t something that you can really deliver on. Investors want guaranteed gains, but there’s no legal way to give low risk high reward guaranteed investments.
Investments that promise to give such rewards get a lot of press attention, and cost a lot, but they rarely deliver. They lose clients who become disillusioned and they end up struggling to find new customers. It’s not a sustainable model. If you want to take on lots of clients you need to make sure that they have reasonable expectations. That’s the only way to build a long-term sustainable business.
It is possible to show off a wealth portfolio that would have performed amazingly in the past and use that to seal the deal with demanding clients, but why do that when it will mean that you have to live with that disappointed client for the months that follow?
2. People prefer doing business with people that they like.
As unfortunate as it is, that is one thing that will never change. People prefer to deal with likeable people who listen to them and communicate clearly. They prefer to deal with bright, attentive and compassionate people that want to see them succeed.
If your customers don’t believe that you are that person then you run the risk of losing them, especially given how difficult it is to quantify the performance of a financial advisory company. No financial advisor is going to retain a client if the customers feel that they are not trustworthy or that there is a personality clash.
Wealth advisors will always be important. Technology can make jobs more efficient and can help advisors to offer more services, work with more people, or do an overall better job but at the end of the day what people really want is to be able to talk to people and have someone to complain to, ask questions to, and have explain all that jargon. Machines can’t take the place of all of that. Unlikeable advisors are not going to do well in the long term. You want to make sure that you can build a business that will survive for the long haul.
3. People feel fear and greed and always will.
Humans are always going to feel fear and greed. No matter what investments they are making, those will be major drivers. People may ask about mutual funds, hedge funds, ETFs, private equity, real estate, venture capital, socially responsible products, stocks, shares, commodities, cryptocurrencies, passive or active investments or any one of a dozen other investment instruments and options but what they really want is someone to promise returns and appease their fears of loss. It is fear and greed that are the biggest drivers of all kinds of investment.
The urge to avoid risk and to jump into a bubble or a bull market is one that is hard to beat. It applies to people from all walks of life and could be seen as being a universal instinct. Just like our ancestors who did not have the urge to run away from predators ended up not living long enough to pass on their genes, people who are not smart with their money will struggle too. Research, software, seminars, tutorials and books can teach the theory required to do well when it comes to investment, but it is very hard to beat that urge to protect yourself from risk and to take reasonable steps to get rewards without falling into the greed trap.
As much as we try to deny it, we are all animals, and our brain reacts partly instinctively to certain perceptions of threat. No matter how well educated we are, when it comes to anxiety it is hard to control our instincts. During a period of market correction it is natural to try to concoct different options to get out of the sticky situations we are in.
When you experience pleasure, whatever the source of that pleasure, we are mentally built to want to keep experiencing that. Whether the high comes from drugs, delicious food, sexual activity or a successful trade it does not matter. Our brain wants us to keep doing whatever it is that made us excited. Reason goes out of the window.
No software can overcome greed and fear. It is the job of a wealth management professional to find ways to keep people trading sensibly when those emotions peak so that they can ride out the risky periods and get enjoy the balance of risk versus reward that the client actually needs, rather than the dollar signs that they are responding emotionally to at that moment in time.
When it comes to understanding and managing financial goals, it’s best to work with a qualified financial advisor or Certified Financial Planner. With dedicated expertise, they’re able to illustrate what’s required to meet specific retirement goals, investment opportunities and create wealth optimally. This is a wonderful way to build for the future and grow financially.
Clients are able to utilize the services of a financial advisor or planner by creating goals (i.e. buy a car) and having them provide guidance. Each financial advisor brings a unique set of qualifications and specializations making it easier to hone in on the right professional. For example, there are mortgage specialists that are able to help manage house-related opportunities and goals. These advisors are trained to make the management of money as easy as possible.
Understand the Credentials and Their importance
In this case, it’s important to realize the value of specific credentials and designations before moving forward. A qualified financial advisor or CFP will have a state-issued license to work in the area and it’s best to make sure they’re valid as a client.
This can help distinguish between different options including advisors and planners.
Remember, while being a financial advisor is a professional designation, this doesn’t mean people can’t claim to be financial advisors. In fact, there are times where people pretend to be qualified by skirting around the regulations using unrelated credentials. For example, there are some professionals that are qualified as being “Personal Finance Planners” but pretend to be qualified financial advisors. There is a difference and it’s essential to realize the difference and look out for dubious specialists. The same applies to those who may have taken the Professional Financial Planning Course (PFPC) as it is not active now and has been discontinued.
If the goal is to find a great wealth management expert then it’s always best to look for a Registered Financial Planner (RFP) or a Certified Financial Planner (CFP). For those residing in Canada, there are over 18,000 CFP holders. Remember, these designations are not only approved in North America but are recognized worldwide. Each professional is fully regulated by the Financial Planning Standards Council (FPSC), which means specific standards and regulations are in place for all designated specialists. These standards have to be upheld for them to remain in good standing with the council. Clients should always take a look at their status before moving forward.
Potential Fees and/or Commissions
In general, the average financial advisor or Certified Financial Planner is going to be working on their own and as a result, will have distinct fee structures.
Most will have a set fee that is going to be established based on the actual service. This is how advisors get paid. However, advisors can be paid with a commission and/or flat-fees depending on their preference.
When it comes to commissions, financial advisors will have a set percentage in place for each financial product that’s sold. Let’s assume a financial advisor is under a specific mutual fund, they will gain a small commission for every dollar that is spent on the mutual fund (i.e. 2%). Of course, this can lead to issues for the client.
When there is an incentive to promote a certain financial product, it can blur the advisor’s approach to managing a client’s financial goals. There is a fine line in this regard and it’s important to look at how the commissions are set up.
However, this can also be a good idea for those with a smaller amount of assets. It keeps things simple and helps save for the future at the same time.
2) Flat Fee
Other advisors prefer to go with a flat-fee structure or are often referred to as a fee only financial planner. This means they ask for a set fee that is paid in advance for their services. This rate is charged on a certain date and that’s it. Everything else is established based on their advice and has nothing to do with their gains.
This is easier for most clients as it keeps things on the straight and narrow.
If a client has a multitude of assets and wants to keep things organized, a flat-fee based option can go a long way in the management process. It keeps things cost-efficient.
Is it Best To Use a Bank-Hired Financial Advisor or an Independent Financial Planner?
There are times when a financial advisor from the local bank is an option. Independent financial planners tend to work on their own as the name suggests while offering similar services.
Bank-Hired Financial Advisors
It’s important to note any bank-hired financial advisor is going to be attached to the hip with their financial institution. This means they are going to be asked to promote the bank or financial institution’s products (i.e. mutual funds). There may even be an incentive for doing so at a financial level.
However, there are benefits to think about with a bank-hired financial advisor that cannot be ignored.
- These Financial Advisors Are Consistent and Easy to Access
- They Follow and Apply to Rigorous Policies and Guidelines
- The Bank’s Brand is a Source of Comfort for Clients
Advisors will often be paid in a similar manner (i.e. salary + bonus). This is ideal for those who want to know how the structure works before selecting a particular planner.
Another advantage comes in the form of potential financial perks that are on offer with bank-hired financial planners. The bank or financial institution will likely provide discounts on its products to new clients (i.e. discounted annual service fees, free chequing accounts).
Independent Financial Planners and Advisors
These professionals can’t be found through a financial institution but there are several online resources available with the best options for wealth management and retirement planning.
Due to their independent nature, these financial advisors and planners will have distinct services. They will be running a personal small business, which comes along with specific specializations. For example, some are only going to work with businesses while others are only going to work with doctors. It’s important to find the one that works in your niche and is able to manage your income/assets.
It’s important to note some financial advisors are going to be related with a separate franchise (i.e. team of independent advisors). A good example of this would be Investors Group as they bring all of the specialized financial planners under one brand and go from there. It can help in finding the ideal fit for your needs as a client and what you’re going for over the long-term.
By going through the online resources, you are able to find the right fit for your needs and end up with an ideal Certified Financial Planner or financial advisor in a timely manner.
Online resources include:
Understanding Forex Trading
This read will explain forex in a simple and easy to understand manner. If you are a novice to forex trading, we will take you through the basics including pricing and the process of placing trades.
Forex is a short term for foreign exchange. It is also referred to as the currency market and FX. It is the largest form of exchange in the world with over $4 trillion trading every day. Foreign exchange is available to both investors and institutions.
The goal of trading is very simple. You should aim at buying a currency at one point and later on sell it at a higher price. Alternatively, you can opt to sell the currency a point and thereafter purchase it at a lower price. In both of these cases, making a profit is the only goal, just like it is with other forms of speculation.
As simple as the above objective may seem, it is easy to get confused owing to the fact that the price of one currency is determined in another currency. For instance, when the price of 1 British pound is to be measured as 2 US dollars, whereby the exchange rate between the GBP and USD is exactly 2.
In FX trading terms, the value of the British pound in this example would be represented as 2.0000 with the forex pair being GBP/USD. Currencies are usually grouped together in order to show the exchange rate between them. These pairs show the price of the first currency in the second currency.
The commonly traded forex pairs, which are termed as ‘major’ pairs include USD/JPY, EUR/USD, and EUR/GBP. However, it is possible to trade many other minor pairs, which are known as exotics. This includes the Polish zloty (PLN), Mexican peso (MXN), and the Norwegian krone (NOK). Treading with the exotics is as frequent as the major pairs. As such, the market is less liquid and the trading spread is much wider.
Forex Trading Spread
Just like it is with any other trading price, the trading spread for FX pair consists of a bid price, which is the price at which you can sell – in other words, the lower end of the spread. The spread also consists of an offer price, which is the price at which you can buy – this represents the higher end of the spread. That being said, it is important to note which way round you are trading for every pair.
When buying, the spread shows the price of buying the very first currency in the FX pair with the second currency of the pair. This means when you have an offer price of 1.2000 for EUR/USD, it will cost you 1.20 dollars to buy 1 euro. Ideally, you would buy at that price if you think the price of the euro will rise against the dollar, thereby allowing you to sell the 1 euro for more than 1.2 dollars that you spent.
On the other hand, when selling, the spread indicates the price of selling the very first currency in the pair for the second. In this case, a bid price of 1.2000 for pair EUR/USD means that you can sell 1 euro for 1.2 dollars. Ideally, you want to sell when you think the price of the euro against the dollar will fall. Therefore, you can buy back your 1 euro for less than the 1.2 you paid for it.
Calculating Your Profit
Let’s look at another example. For instance, the EUR/GBP spread is 0.8414-0.8415. Suppose you think the euro will rise against the pound, you would want to buy euros at an offer price of 0.8415 for every euro. An in this particular case, you purchase €10,000 at the cost of £8415.
Thereafter, the spread of the EUR/GBP goes up to 0.8532-0.8533 and you sell your euros for pounds, at 0.8532 as the bid price. The €10,000 you initially bought is now sold for £8532. As such, you profit in this particular transaction is £8532 minus the original cost you incurred of buying the euros – £8415. Therefore, your profit is £117. At this point, it is important to note that your profit is always determined in the second currency of the particular forex pair.
Alternatively, you reckon the price of the euro against the pound is going to fall, and therefore, you decide to sell €10,000 at the original bid price of 0.8414, therefore, getting £8414.
It turns out you are right and the spread for EUR/GBP does fall eventually to 0.8312-0.8313. After the price has fallen, you decide to buy back your €10,000, at 0.8313 as the offer price, which is costs £8313. In this case, the cost of buying back the euros is £111 less than originally sold the euros for. The £111 is your profit on the transaction. Keep in mind that your profit is determined in your second currency of the pairs.
CFD Trading Or Spread Betting
InterTrader offers 2 different ways of FX trading: spread betting and CFDs. These products allow you to speculate on how the currency markets will move without physically trading the currency. However, they are different with regards to how they operate.
Spread betting involves staking an amount that you have in your account’s currency per pip movement at the price of the forex pair. For example, you might sell (or buy) £15 per pip on USD/JPY to make £15 for every pip the dollar falls (or rises) against the yen. FX traders in this regard, capitalize on short-term movement. Read more about spread betting here.
With CFDs, you sell or buy a contract representing a particular size of the trade. For instance, you might buy 1 contract of GBP/USD with InterTrader represents a trade of £10,000. Your profit or loss will be calculated in the second currency – the US dollar, and, if necessary, converted into your account currency. Read more about CFDs here.
However, do not have to provide the full currency value in order to open your position. You just put down a margin deposit – a fraction of the entire value. Moreover, you do not actually sell and buy currencies, you simple open speculative positions on the forex pair value changes. You make a profit or loss when you close your position by buying or selling.