A talk with one of my mentors, a senior enlisted member in my squadron, made me rethink the way I viewed investing. During one of our conversations I brought up the topic of investing and mentioned I would like to start in a couple years when I had more money. He listened to me give several excuses why I couldn’t invest and then he said something that changed the way I think and act about investing.

He told me saving and investing wasn’t hard, you just have to treat it like a bill. He said, “When your paycheck comes in each month, you pay your bills, right?” I nodded. “So treat investing like a bill. If you want to max out your Roth IRA, divide the maximum contribution by 12 and send that amount to your investment account each month. If you want to make it easier, then go to the finance office and set up an automatic allotment from your paycheck and you’ll never think about it again.”

It turns out he was right. It’s not that I didn’t have enough money to invest. I just wasn’t prioritizing how I used my money. Treating investing like a bill forced me to make investing part of my budget. I followed his advice and set up an automatic withdrawal from my paycheck and I began investing in a Roth IRA. I maxed out my IRA contributions in each of the eleven years following our conversation. That 15 minute conversation literally changed my life and might just make me a millionaire by the time it’s all said and done.

This concept of paying yourself first applies to different types of investments as well. Perhaps the most common way to take advantage of automatic investing is through an employer sponsored retirement plans such as a 401(k) plan, 403(b), 457(b), or the Thrift Savings Plan. You can also apply this to savings goals, Roth or Traditional IRAs, or taxable investments. In fact, many brokerage firms will waive account minimums if you agree to fund your account with a minimum contribution each month. Some brokerage firms even offer lower transaction costs with automatic investments.

Here are three reasons you should consider automatic investing.

It’s easy. You don’t have to remember to do it. Just set it up once and you know it will get done.

There is no emotional barrier. It can be difficult to write a check each month for a future goal when you have current wants you could easily fulfill with those funds. Automatic investing makes it easier to stick to your long term plans.

You don’t try to time the market. Market timing is almost always a losing battle. For the average investor, dollar cost averaging can be a great way to avoid market timing and ensure you get your money in the market for a longer period of time. Automatic investing gives you the greatest opportunity to realize the growth of compound interest.

Ryan Guina is a U.S. military veteran, writer, and professional in the corporate world. He blogs at Cash Money Life and Military Finance Network.

Trade Forex
Mini Forex Trading – MF Financial Ltd.

The Dow Jones industrial average rose about 390 points. The Dow and broader stock indexes rose more than 3 percent. Markets also barreled higher in Europe.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.55 percent from 3.43 percent late Friday.

“The market is breathing a huge sigh of relief that the EU has taken aggressive steps to contain the EU crisis in the weaker states,” said Alan Gayle, senior investment strategist at RidgeWorth Investments.

The 16 countries that use the euro and the International Monetary Fund have agreed to create a nearly $1 trillion rescue fund to support European nations burdened by heavy debt. Markets around the world plummeted last week as fears escalated that Greece’s debt problems would spread throughout Europe and upend a global economic recovery.

The U.S. Federal Reserve said it would also provide loans overseas.

Investors also feared that if Greece didn’t get a bailout, the fate of the euro, which is used by 16 countries, could be in trouble. The euro rose Monday against the dollar.

“Europe has unequivocally said, ‘We will defend the euro’s integrity,’” said Oliver Pursche, executive vice president at Gary Goldberg Financial Services in Suffern, N.Y.

Pursche noted the actions taken don’t mean European leaders will ensure its current value, but that they will do what is necessary to ensure its existence.

The U.S. Federal Reserve and other central banks also stepped up with financial support to help head off what some analysts believe could have been a broader financial crisis.

The Fed reopened a program launched in 2008 during the credit crisis under which dollars are shipped overseas through the foreign central banks. Those central banks can then lend the dollars out to banks in their home countries.

Aside from the Fed, other central banks, including the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan are also involved in the dollar swap effort.

In midmorning trading, the Dow rose 390.50, or 3.8 percent, to 10,770.93. The Standard & Poor’s 500 index rose 45.40, or 4.1 percent, to 1,156.28. The Nasdaq composite index rose 98.46, or 4.4 percent, to 2,364.10.

Stocks were highly volatile at the end of last week as investors shrugged off signs of an improving U.S. economy and focused on Europe’s sovereign debt problems. The Dow fell 5.7 percent last week to erase its gains for the year, while broader indexes fell even further. On Thursday alone, the Dow was down nearly 1,000 points late in the day before recovering much of its losses.

Stocks have dropped four straight days as triple-digit Dow moves have again become the norm. Big swings were also common as the credit crisis grew in late 2008 and the market bottomed in early 2009. In recent months, however, the Dow had been climbing slowly and steadily on repeated signs the economy was recovering.

Pursche said investors should expect more swings in the market. He said that the lack of turbulence in recent months was abnormal and that problems remain. Some European countries still need to enact austerity measures and unemployment remains high in the U.S., Pursche said.

“A 1 percent to 2 percent market move … in either direction is something investors should be prepared to cope with,” Pursche said.

As investors jump back into riskier assets like stocks on Monday, U.S. bond prices tumbled. Gold also fell. Both surged late last week as investors sought safe-haven investments.

Gold fell $14.90 to $1,195.50 an ounce. Crude oil rose $2.47 to $77.58 per barrel on the New York Mercantile Exchange.

At the New York Stock Exchange, 2,973 shares rose while only 91 fell. Trading volume came to 455 million shares compared with 443 million traded at the same point Friday.

In afternoon trading, Britain’s FTSE 100 rose 4.4 percent, Germany’s DAX index surged 4.9 percent, andFrance’s CAC-40 rallied 8.6 percent. Earlier, Japan’s Nikkei stock average rose 1.6 percent.

Despite this market’s overwhelming size, when it comes to trading currencies, the concepts are simple. Let’s take a look at some of the basic concepts that all forex investors need to understand.

Eight Majors
Unlike the stock market, where investors have thousands of stocks to choose from, in the currency market, you only need to follow eight major economies and then determine which will provide the best undervalued or overvalued opportunities. These following eight countries make up the majority of trade in the currency market:

1. United States 
2. Eurozone (the ones to watch are Germany, France, Italy and Spain) 
3. Japan 
4. United Kingdom 
5. Switzerland 
6. Canada 
7. Australia 
8. New Zealand

These economies have the largest and most sophisticated financial markets in the world. By strictly focusing on these eight countries, we can take advantage of earning interest income on the most credit worthy and liquid instruments in the financial markets.

Economic data is released from these countries on an almost daily basis, allowing investors to stay on top of the game when it comes to assessing the health of each country and its economy.)

Yield and Return
When it comes to trading currencies, the key to remember is that yield drives return.

When you trade in the foreign exchange spot market, you are actually buying and selling two underlying currencies. All currencies are quoted in pairs, because each currency is valued in relation to another. For example, if the EUR/USD pair is quoted as 1.3500 that means it takes $1.35 to purchase one euro.

In every foreign exchange transaction, you are simultaneously buying one currency and selling another. In effect, you are using the proceeds from the currency you sold to purchase the currency you are buying. Furthermore, every currency in the world comes attached with an interest rate set by the central bank of that currency’s country. You are obligated to pay the interest on the currency that you have sold, but you also have the privilege of earning interest on the currency that you have bought.

As an example, let’s look at the New Zealand dollar/Japanese yen pair (NZD/JPY). Let’s assume that New Zealand has an interest rate of 8% and that Japan has an interest rate of 0.5% In the currency market, interest rates are calculated in basis points. A basis point is simply 1/100th of 1%. So, New Zealand rates are 800 basis points and Japanese rates are 50 basis points. If you decide to go long NZD/JPY you will earn 8% in annualized interest, but have to pay 0.50% for a net return of 7.5%, or 750 basis points.

Leveraging Returns
The forex market also offers tremendous leverage – often as high as 100:1 – which means that you can control $10,000 worth of assets with as little as $100 of capital. However, leverage can be a double-edged sword; it can create massive profits when you are correct, but may also generate huge losses when you are wrong.

Clearly, leverage should be used judiciously, but even with relatively conservative 10:1 leverage, the 7.5% yield on NZD/JPY pair would translate into a 75% return on an annual basis. So, if you were to hold a 100,000 unit position in NZD/JPY using $5,000 worth of equity, you would earn $9.40 in interest every day. That’s $94 dollars in interest after only 10 days, $940 worth of interest after three months, or $3,760 annually. Not too shabby given the fact that the same amount of money would only earn you $250 in a bank savings account (with a rate of 5% interest) after a whole year. The only positive over having the bank account earn you interest is that the return would be risk-free.

The use of leverage basically exacerbates any sort of market movements. As easily as it increases profits, it can just as quickly cause large losses. However, these losses can be capped through the use of stops. Furthermore, almost all forex brokers offer the protection of a margin watcher – a piece of software that watches your position 24 hours a day, five days per week and automatically liquidates it once margin requirements are breached. This process insures that your account will never post a negative balance and your risk will be limited to the amount of money in your account.

Carry Trade Success
The key to creating a successful carry trade strategy is not simply to pair up the currency with the highest interest rate against a currency with the lowest rate. Rather, far more important than the absolute spread itself is the direction of the spread. In order for carry trades to work best, you need to be long a currency with an interest rate that is in the processes of expanding against a currency with a stationary or contracting interest rate. This dynamic can be true if the central bank of the country that you are long is looking to raise interest rates or if the central bank of the country that you are short is looking to lower interest rates.

In the previous USD/JPY example, between 2005 and 2006, the U.S. Federal Reserve was aggressively raising interest rates from 2.25% in January to 4.25%, an increase of 200 basis points. During that same time, the Bank of Japan sat on its hands and left interest rates at zero. Therefore, the spread between U.S. and Japanese interest rates grew from 2.25% (2.25% – 0%) to 4.25% (4.25% – 0%). This is what we call an expanding interest rate spread. 
The bottom line is that you want to pick carry trades that benefit not only from a positive and growing yield, but that also have the potential to appreciate in value. This is important because just as easily as currency appreciation can increase the value of your carry trade earnings, currency depreciation could erase all of your carry trade gains and then some.

Getting to Know Interest Rates
Knowing where interest rates are headed is important in forex trading and requires a good understanding of the underlying economics of the country in question. Generally speaking, countries that are performing very well, with strong growth rates and increasing inflation will probably raise interest rates to tame inflation and control growth. On the flip side, countries that are facing difficult economic conditions ranging from a broad slowdown in demand to a full recession will consider the possibility of reducing interest rates.

Conclusion
Thanks to the widespread availability of electronic trading networks, forex trading is now more accessible than ever. The largest financial market in the world offers a world of opportunity for investors who take the time to get to understand it and learn how to mitigate the risk of trading here.

]]> http://www.forexyellowpages.com/2010/04/05/basic-concepts-for-the-currencies-market/feed/ 0 http://www.forexyellowpages.com/2010/02/08/what-a-9-7-percent-unemployment-rate-means/ http://www.forexyellowpages.com/2010/02/08/what-a-9-7-percent-unemployment-rate-means/#comments Mon, 08 Feb 2010 13:48:04 +0000 paul http://www.forexyellowpages.com/?p=757 Despite economists’ expectations that the unemployment rate would climb well into the economic recovery, the percentage of unemployed, job-seeking Americans fell 0.3 percentage point in January to 9.7 percent, its lowest point since August. The unemployment rate is calculated through a separate survey from the payroll count, which found the nation’s employers still reluctant to add new workers, as jobs fell by 20,000.

The report truly brought mixed news. While employers are still not beefing up their payrolls, the Labor Department’s survey of households found major employment gains. The results were altogether better than many were expecting. “All in all, we see encouraging signs of progress in labor market conditions and expect to see much better payroll performance … in coming months,” Morgan Stanley economists Ted Wieseman and David Greenlaw wrote in a morning note.

Where is the hiring? For one thing, the Labor Department reports that the number of people in part-time jobs who want full-time work but can’t find it or had their hours cut, fell from 9.2 million to 8.3 million. Not surprisingly, the average number of hours worked in a week rose 0.1 hour to 33.3 hours. These are good indications that demand is picking up and employers are responding by paying their employees to work more hours, which may be a first step, before they begin hiring new workers.

Perhaps the strongest indicator that employers are testing the hiring waters is the continuing increase in temporary help services jobs. In January, employers added 52,000 temp jobs, bringing the total number of temp jobs added since September to 247,000. Many economists consider temp services a leading indicator for permanent hires, but some are cautious. “Whether this is a harbinger of stronger gains in permanent employment or a reflection of many businesses still not being convinced that they need to pull the trigger on permanent hires remains to be seen,” says Joshua Shapiro, chief U.S. economist at MFR.

The retail sector also saw job growth, adding 42,000 jobs last month. The biggest gains were in food stores and clothing stores. Healthcare continued to expand its payrolls, and the federal government added 33,000 jobs, 9,000 of which are temporary positions for the census. State and local governments, wrestling with major budget woes thanks to a double whammy of higher recessionary expenses and lower tax revenues, continued to lose jobs.

Who’s seeing some benefit? This recession has been coined the “man-cession,” because of the massive job losses in the construction and manufacturing industries, which traditionally employ disproportionately high percentages of men. Indeed, last month, women made up an astounding 49.9 percent employed workers. When the recession began in 2007, 48.8 percent of nonfarm payroll employment was made up of women. Last month the unemployment rate for women fell to 7.9 percent, compared with a steady 10 percent unemployment rate among men.

A major bright spot in the report was the significant decline in the percentage of under-employed workers–the job-seeking unemployed plus those who are working part-time but want full time work; the unemployed who are not looking for work because they are in school or have other obligations; as well as those who have simply lost hope in finding work. In January, the under-employed made up 16.5 percent of the workforce, down 0.8 percentage point from December.

Who’s still hurting? There’s no question that the workers struggling most now are those who have been out of work the longest. The number of unemployed who have been out of work for 27 weeks or more reached 6.3 million in January. The average duration of unemployment among the jobless reached 30.2 weeks. That means more than 40 percent of the unemployed have been looking for work for about seven months or more.

That may in part be because the recession continues to hammer specific sectors. Construction employment fell by another 75,000 in January. Most of the job losses were in non-residential specialty trade construction. The sector has now lost 1.9 million jobs since the start of the recession. Also last month, 19,000 transportation and warehousing jobs were cut, driven by a big loss in courier and messenger jobs.

This week the National Employment Law Project reported nearly 1.2 million unemployed will become ineligible for federal jobless benefits in March, and by June, 5 million would become ineligible. “The continued high rate of long term unemployment reflected in January’s jobs report underscores the urgent need for action from Congress to maintain the lifeline of jobless benefits for millions of unemployed workers caught in the undertow of this recession,” says Christine Owens, executive director of NELP.

Will the job market keep improving? No one knows what this recovery will look like, although most economists believe that jobs will take some time to recover. The Labor Department revised its earlier job loss and gain figures to show that 64,000 jobs were added in November, rather than the 4,000 originally reported. While that gain sounds pretty good, the figures for December were revised to show 150,000 jobs were slashed from payrolls, instead of the 85,000 job cuts first reported. Nobody expects a smooth trend, but these numbers make it very difficult to know what future months will hold.

Morgan Stanley’s Wieseman and Greenlaw said they are getting “closer to calling the peak in the unemployment rate.” Still, the unemployment rate could bounce higher again if workers who dropped out of the job hunt are encouraged enough to jump back in. In the meantime, expect the Senate to move forward with a jobs bill aimed at small businesses, infrastructure investment, and green energy. “While today’s report shows positive signs that the economy is moving in the right direction, the numbers underscore that we still have work to do to get Americans back to work,” Labor Secretary Hilda Solis said in a statement. “The president has made it clear that job creation is our number one focus in 2010.”

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British Pound Continues to Retrace the Decline From December, Euro Remains Supported by 200-Day SMA

The British Pound crossed back above the 50-Day SMA (1.6338) during the overnight trade to reach a high of 1.6381, and the GBP/USD may continue to retrace the decline from December as market participants raise their appetite for risk. Meanwhile, Ernst & Young’s Item Club held a cautious outlook for the U.K. and said that the region faces a “challenging” year as households face a weakening labor market paired with tightening credit conditions, and forecasts the growth rate to increase at an annual pace of 1.0% in 2010 as the expansion in monetary and fiscal policy continues to feed through the real economy.

At the same time, the Rightmove home price index gained 0.4% in January after tumbling 2.2% during the previous month, while the annualized rate increased 4.1% from the previous year after rising 1.7% in December to mark the fourth consecutive rise. The breakdown of the report showed home prices in six of the ten regions increased during the month as “limited supply of sellers is being outstripped by buyer demand,” and conditions are likely to improve going forward as the economy emerges from the worst recession since the post-war period. Nevertheless, the slew of U.K. data scheduled for this week is likely to stoke increased volatility in the exchange rate, and we may see a major breakout following the Bank of England meeting minutes due out on Wednesday at 9:30 GMT as investors weigh the outlook for future policy.

The Euro tipped lower against the greenback for the third day, with the exchange rate slipping to a low of 1.4333, and the EUR/USD may continue to trend sideways over the week as the pair remains supported by the 200-Day SMA at 1.4283. Nevertheless, the European Central Bank announced it will discontinue swap operations with the Swiss National Bank “against the background of declining demand and improved conditions in the funding markets,” and the central bank may continue to normalize policy over the coming months as the Governing Council holds an improved outlook for the region. Moreover, the Bundesbank said that the economic recovery in Germany remains ‘fundamentally intact,’ but went onto say that the pace of expansion was significantly slower in the fourth quarter of 2009 as activity in the domestic economy remains weak.

U.S. dollar price action was mixed across the board, with the USD/JPY extending the decline from the previous week to reach a low of 90.65, and risk trends are likely to dictate price action going into the North American trade as the economic calendar remains fairly light for Monday. U.S. equity futures are slightly higher on the day, led by a 0.12% rise in the S&P 500, and a rise in risk appetite is likely to weigh on the greenback as it remains the most popular funding-currency next to the Japanese Yen.

At the same time the Usd was the one of weakest currencies in global trade. However, since Dec. 3 and the last U.S. non-farm payroll report, gold has declined by more than $150 (-12%) in just three weeks, as shown on this chart.

The three-week gold move has fed off very strong down-side momentum, and a freshly broken trend-line suggests that this may be a near-term, first leg, of something larger to follow. The Elliott Wave team at the TheLFB.com will monitor gold weakness and Usd strength in the first part of 2010.

One of the pairs that reflects the sentiment for Usd based moves is Usd/Chf, since it is linked to interest rate differential based trade and does tend to signal Usd momentum swings better than most currencies. On the long side of swissy, the trade team is watching for signals of a long move, possibly up towards the 1.100 zone, while gold may fall back towards $1000 per ounce.

Elliott wave view: Usd/Chf

Swissy reached new 2009 lows on Nov. 26, at a point that the market saw a Usd bear market reversal. Overall we are looking at two long-term wave count, and what is important to note is that both of the wave counts signal for Usd strength within the next couple of months.

Wave count No.1: You will see a long-term bullish wave count following a Short blue wave B), that may already be completed somewhere above the 0.9634 support area. Traders may be looking for a higher impulse wave C) move. Impulse moves mean a five wave structure, which is bullish in our case.

At the same time the Usd was the one of weakest currencies in global trade. However, since Dec. 3 and the last U.S. non-farm payroll report, gold has declined by more than $150 (-12%) in just three weeks, as shown on this chart

The three-week gold move has fed off very strong down-side momentum, and a freshly broken trend-line suggests that this may be a near-term, first leg, of something larger to follow. The Elliott Wave team at the TheLFB.com will monitor gold weakness and Usd strength in the first part of 2010.

One of the pairs that reflects the sentiment for Usd based moves is Usd/Chf, since it is linked to interest rate differential based trade and does tend to signal Usd momentum swings better than most currencies. On the long side of swissy, the trade team is watching for signals of a long move, possibly up towards the 1.100 zone, while gold may fall back towards $1000 per ounce.

Elliott wave view: Usd/Chf

Swissy reached new 2009 lows on Nov. 26, at a point that the market saw a Usd bear market reversal. Overall we are looking at two long-term wave count, and what is important to note is that both of the wave counts signal for Usd strength within the next couple of months.

Wave count No.1: You will see a long-term bullish wave count following a Short blue wave B), that may already be completed somewhere above the 0.9634 support area. Traders may be looking for a higher impulse wave C) move. Impulse moves mean a five wave structure, which is bullish in our case.

Usd/Chf Weekly Elliott Wave View

Wave count No.2: The second wave count is long-term bearish, since we came out with a completed black wave B leg around the 1.2400 top. We counted a move up from the wave A lows to the wave B highs as a double zig-zag pattern, separated by a wave (X). After that, the market made a very sharp decline in a blue wave 1) followed by a sharp reversal in blue wave 2), before prices fell into a down-trend channel with a five wave move.

If this wave count is correct, the market should make three waves of retracement into a Long wave II pull-back over the coming weeks and months, since we can count five completed waves down in our red wave I. Elliott wave traders will always look for a three waves of a reversal once a five wave pattern is complete.

Usd/Chf weekly Elliott Wave view

Above are two of three charts posted on this currency to members each day, that make up 30 charts in total that cover six major currency pairs, equity futures, oil, gold, and the dollar index.

]]> http://www.forexyellowpages.com/2010/01/07/gold-enjoys-big-move-in-2009/feed/ 0 http://www.forexyellowpages.com/2009/12/19/forex-trading-margin-and-leverage/ http://www.forexyellowpages.com/2009/12/19/forex-trading-margin-and-leverage/#comments Sat, 19 Dec 2009 00:03:35 +0000 paul http://www.forexyellowpages.com/?p=745 Additionally, Forex trading with us is done on a margin system, essentially using a free short-term credit allowance used to purchase an amount of currency that greatly exceeds the traders account value

Understanding the Margin System
Trading currencies on margin lets you increase your buying power. Here’s a simplified example: If you have $2,000 cash in a forex margin account that allows 1:100 leverage, you could purchase up to $200,000 worth of currency-because you only have to post 1% of the purchase price as collateral. Another way of saying this is that you have $200,000 in buying power.

You are probably wondering how a small investor can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep. Sounds too good to be true? Well this is how forex trading using leverage works.

For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 you can trade up to $500,000 of Forex.

In the example above, it is used a one percent margin. This means that for every $100,000 traded, the forex broker wants $1,000 as a depost on the position.

What is a Margin Call?
In the event that money in your account falls below margin requirements (usable margin), your account will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.

Example #1
Let’s say you open a regular Forex account with $2,000. You open 1 lot of the USD/JPY, with a margin requirement of $1000. Usable Margin is the money available to open new positions or sustain trading losses. Since you started with $2,000, your usable margin is $2,000. But when you opened 1 lot, which requires a margin requirement of $1,000, your usable margin is now $1,000.

If your losses exceed your usable margin of $1,000 you will get a margin call.

Example #2
Let’s say you open a regular Forex account with $10,000. You open 1 lot of the USD/JPY, with a margin requirement is $1000. Remember, usable margin is the money you have available to open new positions or sustain trading losses. So prior to opening 1 lot, you have a usable margin of $10,000. After you open the trade, you now have $9,000 usable margain and $1,000 of used margin.

If your losses exceed your usable margin of $9,000, you will get a margin call.

Make sure you know the difference between usable margin and used margin.

If the equity (the value of your account) falls below your usable margin due to trading losses, you will either have to deposit more money or the system will close your position to limit your risk. As a result, you can never lose more than you deposit.

Leverage Ratio and Margin Percentage
The simple relationship between the two terms are:

Leverage = 100 / Margin Percent
Margin Percent = 100 / Leverage

Leverage is conventionally displayed as a ratio, such 1:100

Margin Trading: Stocks vs Forex

The word “margin” means something very different in forex than it does in stocks.

With stocks, trading on margin means that a trader can borrow up to 50% of a stock’s value to buy that stock. This can be a costly move because the investor must pay interest to the brokerage firm on the amount borrowed. This is not the case in forex trading.

For example: at $400/share, 100 shares of Google are valued at $40,000 ($400 x 100 shares). To trade this stock on margin, the money required for the trade is 50%, or $20,000. The remaining $20,000 is borrowed and interest must be paid on that amount. Margin interest is different from broker to broker, but a good rule of thumb is typically Prime plus 1-3% or more.

In forex, margin is the minimum required balance to place a trade. When you open a forex trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, is typically 1% of the value of the position.

For example: if you want to purchase $100,000 of USD/JPY at 1:100 leverage, the money required is 1%, or $1000. The other $99,000 is collateralized with your remaining account balance. You pay no interest.

It is very important to remember that leverage magnifies your profits AND your losses. You should monitor your account balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.

However, leverage is an exceptionally good tool that can be utilized to increase your buying power and return on capital, as long as you have a solid risk management plan in place.

But the dollar isn’t an asset — it’s a vehicle through which investments are made. And the fact that investors around the world are buying more and more non-U.S. assets suggests that the dollar will keep falling.

There are, of course, plenty of reasons here at home that the dollar is faltering. Among them: rising deficits; low interest rates paid out by our bonds; and rising inflation fears.

But the dollar is also weaker because “investors think there are better places to put their money to work than in the U.S.,” says Jack Ablin, chief investment officer for Harris Private Bank.

Indeed, the 37% drop in the dollar’s value against a basket of other currencies since 2001 coincides with an unprecedented demand for the assets of other economies, especially shares of companies in fast-growing places such as China and Latin America.

A decade ago, U.S. stocks comprised 54% of the world’s stock market value; today they represent only a third. As investors shift out of the U.S. market, they exchange dollars for the currencies of countries where they’re doing their buying, reducing demand for the buck.

Safety isn’t enough

To be sure, the dollar is still the world’s “safe haven” currency, says Jeffrey Kleintop, chief market strategist for LPL Financial. The dollar’s value spiked after the 9/11 terrorist attacks and again last year during the global credit freeze.

In both instances investors rushed into Treasury bonds, which required the purchase of dollars. So there will be occasions when the buck bucks its long-term trend. But that’s not the same as holding back the tide.

Expand your horizons

This doesn’t mean that the U.S. economy is crumbling. The strength of a nation’s currency is never a pure reflection of economic might. The yen gained on the dollar this year even though Japan’s economy shrank twice as fast as this country’s did.

Nor does it mean you should be dumping U.S. stocks. Keep in mind that nearly half of all revenue for companies in the S&P 500 index comes from outside the U.S., up from 32% at the start of this decade. And the falling buck makes dollar-based goods look attractive to foreign buyers. A jump in U.S. exports is already starting to help, as third-quarter S&P 500 earnings are coming in ahead of analyst estimates.

But the dollar’s long-term decline does argue for keeping a sizable portion of your stock portfolio — at least 25% and up to 50% — in foreign shares. Their value will rise simply based on the currency exchange. Meanwhile, you’ll be taking advantage of the opportunities that await you overseas.

Exchange traded funds (ETFs)  are listed on an exchange and can be traded intraday. Investors can buy or sell shares in the collective performance of an entire stock or bond portfolio as a single security. Exchange traded funds add the flexibility, ease, and liquidity of stock trading to the benefits of traditional index fund investing.

Exchange-traded funds (ETFs) are increasing in popularity, as they are often responsible for approximately 50% of the daily trade volume on the American Stock Exchange (AMEX). ETFs are passive funds that track their related index and have the flexibility of trading like a security. They are managed by professionals and provide the investor with diversification, cost and tax efficiency, liquidity, marginability, are useful for hedging, have the ability to go long and short, and some even provide quarterly dividends.

ETFs are unit investment trusts (UITs) that have two markets. The primary market is where institutions swap “creation units” in block-multiples of 50,000 shares for in-kind securities and cash in the form of dividends. The secondary market is where individual investors can trade as little as a single share during trading hours on the exchange. This is different from open-end mutual funds that are traded after hours once the net asset value (NAV) is calculated.

The most widely traded and well-known ETF is the SPDR (pronounced spider, Standard and Poor’s Depository Receipt). Other ETFs include Diamonds (Dow Jones Industrial Average), Qubes (Nasdaq-100 Index Tracking Stock) named after the ticker, QQQ, and Webs (World Equity Benchmark Shares). Webs mirror indices in foreign equity markets. There are currently 30 ETFs available on the AMEX and they include 17 Webs, 11 SPDRs (includes sectors), and one Qube and one Diamond.

The American Stock Exchange lists ETFs on more than 100 broad stock market, stock industry sector, international stock, and U.S. Treasury, and corporate bond indexes, providing a wide array of investment opportunities. ETFs provide a simple and effective way to invest in equity markets worldwide and the U.S. bond market. Investors can establish long-term investments in the market performance of the leading companies in the leading industries in the United States or abroad, or tailor asset allocations using diversified investments in stocks in particular industries or countries or in U.S. bonds.

Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on major stock exchanges. Want to invest in the market quickly and cheaply? ETFs are the most practical vehicle. They help the investor focus on what is most important, choice of asset classes.

All the major stock indexes have ETFs based on them, including:

• Dow Jones Industrial Average
• Standard & Poor’s 500 Index
• NASDAQ Composite

There are ETFs for large US companies, small ones, real estate investment trusts, international stocks, bonds, and even gold. Pick an asset class that is publicly available and there is a good bet that it is represented by an ETF or will be soon.

ETFs differ fundamentally from traditional mutual funds, which do not trade midday. Traditional mutual funds take orders during Wall Street trading hours, but the transactions actually occur at the close of the market. The price they receive is the sum of the closing day prices of all the stocks contained in the fund. Not so for ETFs, which trade instantaneously all day long and allow an investor to lock in a price for the underlying stocks immediately.

ETFs are economical to buy and especially to maintain over the long-run, making them especially attractive for the typical buy-and-hold investor. Annual fees are as low as .09% of assets, which is breathtakingly low compared to the average mutual fund fees of 1.4%. Although investors must pay a brokerage transaction to purchase them, with discount brokers this becomes negligible with sizable trades. There are a few easy-to-avoid pitfalls to watch out for. Tax effects are also not to be ignored, and ETFs perform well after-tax. They can be margined, and options based on them allow for various defensive (or speculative) investing strategies.

Their safety as a securities instrument (considered separately from the safety of any particular asset class they might represent) is considered the same as stock certificates themselves. Internally, ETFs are far more complex entities than mutual funds. A fascinating combination of players, including brokers, money managers and market specialists combine to make them run smoothly. Legally, ETFs are a class of mutual fund as they fall under many of the same Securities Exchange Commission rules that traditional mutual funds do. But their different structure means that the SEC has imposed different requirements from traditional mutual funds in how they are bought and sold.

ETFs are index funds at heart, so investors are encouraged to study the philosophy of index investing which downplays stock picking in favor of buying the market. But unlike most traditional index funds, investors need not take a passive, buy-and-hold approach. ETFs are also becoming favorites of hedge funds and day traders who like to pull the trigger frequently. Both types of investors may coexist and in fact strengthen each other by lowering overall transaction costs.

ETFs, like index funds in general, tend to offer greater tax benefits because they generate fewer capital gains due to low turnover of the securities that comprise the portfolio. Generally, an ETF only sells securities to reflect changes in its underlying index. Exchange trading of ETFs further enhances their tax efficiency. Investors who want to liquidate shares in an ETF simply sell them to other investors through exchange trading. Because of this unique structure, ETFs are not required to sell securities to meet investor cash redemptions, potentially generating capital gains tax liability for remaining investors. Keep in mind that the sale of an ETF will generate capital gains/losses for the investor liquidating shares.

As luck would have it ETFs are also quite tax-efficient. Because of the way they are created and redeemed, they allow an investor to pay most of his capital gains upon final sale of the ETF, delaying it until the very end. There is no way to avoid capital gains, but delaying it is valuable because the amount that would have been paid to taxes can continue to accumulate wealth. Exactly how much an investor benefits after-tax depends on their marginal tax rate, the return of the investment, and how long they hold the investment. Overall, ETFs are similar to tax managed index mutual funds, slightly more efficient than standard mutual funds, and significantly more efficient than actively managed mutual funds.

Traditional mutual funds accumulate unrealized capital gains liabilities for stocks that have risen in value. Upon sale of these stocks the fund calculates and periodically distributes the capital gains to its investors in proportion to their ownership. The following table illustrates a comparison of ETFs versus standard index mutual funds:

Most open-end index funds can be purchased directly from their distributors without a transaction fee. Those bought through the discount brokers like Charles Schwab or E*Trade usually include a transaction charge of $15-$30 or more. Exchange-traded funds, on the other hand, are subject to regular brokerage commissions on all purchases and sales. An additional cost to investors in ETFs is the “spread” between the bid and ask price. This can amount to over 1% of the purchase or sale price.

Expense ratios (ER) are very similar among ETFs and open-end index funds. However, there is often an additional cost of ownership to holding ETFs. SPDRs, for example, pay dividends quarterly directly to investors. An open-end index fund like the Vanguard 500 Index reinvests dividends into new shares as they are paid. The delay of dividend reinvestment with ETFs is often referred to as “dividend drag.”

* 0.18% after expense reimbursement by fund manager.

Source: Index funds

Exchanged-trade index funds offer investors even greater flexibility than open-end index funds and may offer cost and tax advantages. Investors should be aware, however, that the unique advantages of ETFs, such as greater trading flexibility and the ability to sell short, might turn out to be very costly features in the long run. Investors are still wise to avoid the temptation of market timing and use ETFs as part of a diversified, long-term investment strategy

Because they are exchange traded, ETFs can be:

ü bought and sold at intraday market prices
ü purchased on margin
ü sold short, even on a downtick (unlike common stocks)
ü traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade

ETFs are priced and traded throughout the day, and are not restricted to once-a-day trading at the end of the day. And because the pricing of ETFs is continuous during trading hours, investors will always be able to obtain up-to-the-minute share prices from their broker or financial adviser.

Because each ETF is comprised of a basket of securities, it inherently provides diversification across an entire index. Additionally, the expanding universe of ETFs available offers exposure to a diverse variety of markets, including:

ü broad-based equity indexes (such as total market, large-cap growth, and small-cap value)
ü broad-based international and country-specific equity indexes (such as Europe, EAFE, and Japan)
ü industry sector-specific equity indexes (such as healthcare, energy, and real estate)
ü U.S. bond indexes (such as long-term Treasury bonds and corporate bonds)

Dividends paid by companies and interest paid on bonds held in an ETF are distributed to ETF holders, less expenses, on a pro rata basis. Of course, not all companies will pay dividends. Based on past performance, few, if any, distributions can be expected from certain ETFs. There may also be opportunities for reinvestment of distributions.

Investors can capitalize on the convenience and flexibility of ETFs to pursue a wide variety of investment strategies.

Investors can use ETFs as a core investment for their portfolio. The purchase of shares in a single ETF can provide broad market exposure of a portfolio of stocks or bonds for long-term holding that is easy to establish, easy to track, inexpensive, and tax efficient.

Portfolio diversification—ETFs cover virtually every segment of the equity market and several segments of the U.S. bond market, providing an easy and convenient way to adjust the investment mix of a core portfolio.

Hedging—Exchange traded funds can be purchased on margin and sold short (even on a downtick), which has opened up risk management strategies for individual investors that were once available only to large institutions. For example, ETFs can be sold short to hedge a core stock portfolio or interest rate fluctuations. This allows investors to keep their portfolio intact while protecting them from market losses. In a declining stock market or rising interest rate environment, profits from a short position can offset some of the losses in a portfolio. (Investors are required to make arrangements to borrow securities before selling short.) Listed options, available on some ETFs, also offer opportunities for additional hedging or to increase income. Investors should contact their broker regarding initial and maintenance margin requirements.

Cash management—ETFs have often been used to “equitize” cash, providing a way for investors to put cash to work in the market or maintain allocation targets while determining where to invest for the longer term.

Rebalancing—Investors can adjust ETF positions at any time throughout the trading day, without redemption fees or short-term restrictions. Again, usual brokerage commissions will apply.

Tax loss strategy—An investor can sell a security that is underperforming and claim a tax loss but retain exposure to its sector by investing in an ETF. Consult a tax advisor about a tax loss strategy.

Risks and other considerations ETF shareholders are subject to risks similar to those of holders of other diversified portfolios. A primary consideration is that the general level of stock or bond prices may decline, thus affecting the value of an equity or fixed income exchange traded fund, respectively. This is because an equity (or bond) ETF represents interest in a portfolio of stocks (or bonds). When interest rates rise, bond prices generally will decline, which will adversely affect the value of fixed income ETFs. Moreover, the overall depth and liquidity of the secondary market may also fluctuate.

An exchange traded sector fund may also be adversely affected by the performance of that specific sector or group of industries on which it is based.

International investments may involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, or economic, political instability in other nations.

Although exchange traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors.

There are some  common misconception on exchange-traded fund liquidity .

It is common for  investors to believe that the liquidity of an ETF is dependent on the fund’s average trading volume, or the number of shares traded per day. However, this is not the case. Rather, a better measure of ETF liquidity is the liquidity of the underlying stocks in the index. Understanding this fact requires a brief look into how ETFs function on a basic level.

All ETFs trade like stocks where market makers ordered the creation and redemption of ETF shares. Market makers build an ETF share from the shares of the companies in the underlying index. They create or redeem shares depending on the market demand for the ETF shares.

It should also be noted that market makers and specialists can create and redeem shares to arbitrage premiums or discounts to the underlying net asset value (NAV). This activity is beneficial to ETF investors because it keeps the price of the fund in line with the NAV and prevents specialists from making unfair markets. Think of it as a mechanism that ensures retail investors like us will get a fair price as the market makers step all over each other trying to make a buck.

Large brokerage houses such as Morgan Stanley and Salomon Smith Barney also occasionally act as authorized participants when a client makes a large order. Based on their ability to purchase the underlying stocks in the ETF, they can create a huge number of ETF shares instantly with little difficulty in a liquid index like the S&P 500. In essence, there is enormous liquidity in ETFs based on popular indexes – the AP just has to turn on the hose.

Not surprisingly, ETFs based on indexes that also have derivatives tied to them have even slimmer bid-ask spreads. The reason is that there is heightened interaction between the specialists, market makers, and arbitrageurs. In other words, ETF shareholders benefit from this increased competition because it narrows spreads. For example, State Street Global Advisors recently reported that the average bid-ask spread calculated over 160 days on SPDR 500 (AMEX:SPY – News) was 0.09%. More firms are researching ETF bid-ask spreads, and the results confirm that ETFs tied to liquid indexes have very small spreads.