More Private Investors Try Their Luck in Forex Margin Trading

      May 09, 2011 09:42

      Private investors are jumping into currency trading lured by the prospects of huge profits amid sharp fluctuations in global exchange markets. Some 100 investors flocked to a presentation last month on forex margin trading by Kiwoom Securities, one-fifth of them women and half novices.

      Forex margin trading is a highly speculative derivative instrument where investors seek profits from fluctuations in currency values while selling and trading two different currencies, as well as shifts in interest rates. It is favored by the "Mrs. Watanabes," a generic name for Japanese housewives who speculate on the bourse.

      "Every 200 to 300 new accounts are being created," said one Kiwoom Securities staffer. "The forex market is open 24 hours a day, so we're seeing a wide range of people from university students and housewives to full-time investors and even office workers who often trade during the evening hours after work."

      According to the Korea Financial Investment Association, the amount of forex margin trades surged from US$26.8 billion in January last year to $56.7 billion in March this year. That is roughly the same amount of trading volume of $50-70 billion during the global financial crisis in 2008, when investors flocked to the forex market to profit from sharp fluctuations.

      There are several Internet-based groups where members share forex margin trading tips, each boasting more than 10,000 members.

      According to a study by the Financial Supervisory Service in July 2009, 99 percent of the W358 trillion (US$1=W1,086) invested in forex margin trading from January to May that year came from private investors. A private investor needs just $5,000 to carry on trades worth $100,000 or 20 times the original amount. As a result, a mere 3 percent profit rate translates into a 20-fold increase in profits. But it also means investors face the risk of a 20-fold loss.

      Despite the lure of huge sums of money, few private investors appear to have made significant profits. According to the FSS study in 2009, 90 percent of the total 6,000 private accounts had blown their principal, and most them are believed to have been private investors.

      At the time, private investors lost W44.9 billion, while corporate or institutional investors wagered around W3.7 trillion but lost only W600 million. "Forex margin trading requires thorough analysis of the flows of the euro against the dollar and the yen against the dollar, making it very difficult for private investors," said an FSS official.

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