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Many online "Forex brokers" are scams.. Many of them just have very dirty tricks up their sleeves. For example they will let you trade with $1 which you can deposit with any SA cheque/credit card. But when time comes to withdraw the funds they will say you need a minimum of $100 to withdraw and the withdraw fee is $30. Which to me just says, why make the minimum deposit $1?? You can't possibly get it out. (In fact calculate how much you really need to invest and you see you need a fairly large position - which brings up in turn the question how much do I trust that broker to keep so much of my money???)
So the traps to watch out for are: Withdrawal of funds, the types of banks they allow, the types of fees incurred - because like a good honeycomb it's easy to get your hands in but hard to get them out.
Local brokers also have pitfalls. One is for example "holding fees" - which they say is for holding your certificate safe. So what if one wants to have their certificate on hand? Why pay the fee? Other fees could be called account management fees - fees charged monthly just because you have an account with that broker. And are many other fees involved in buying local equity. The way to avoid them is also just solid calculation - and the result of the calculation it often becomes obvious that a fairly significant amounts of funds are needed to operate a profitable position.
However, it is not necessary to hold a direct equity position. Sometimes it is better to construct a synthetic cash position or trade warrants.
I do believe that a foreign position of some sort is absolutely necessary.
There are several ways of managing exchange rate risk:
1) Options.
Options on the JSE are unfortunately very much cast in stone and their expiry dates are here-and-there (maybe that suits people who don't transact very often)
Min contract is $1000, with USDZAR -the only one I know.
It works like this - you might want to pay a supplier in the future. That opens you to the risk that the rand will depreciate in the mean time. You buy a Call Option which expires around that time. If the price
2) Futures
$1000 JSE contracts which fix the future price of a currency (long or short) - however notice the brokerage fees to keep the account open during the contract duration.
3) FRAs
Did you know that your bank can fix your exchange rate sometimes between 21 day at least into the future with an ordinary instruction over the counter at your bank's FOREX department?
However, like the above contract you have to buy the currency at the appointed time. Either way, you want to manage uncertainty (risk) - and this does take the uncertainty away. The agreed rate will be a little higher than the spot rate (current rate)
Interesting point, how does the bank cover it's own risk? As you place the order to buy currency in the future, they go and buy it immediately using the spot rate and hold it for you. They are guaranteed to earn the difference between the quoted price which is a markup of the future price including interest.
4) Offshore deposit
Simply have the cash moved overseas when the exchange rate was good and keep it there to make payments from. (One way)
Investment is not a guessing game guys. It's really a risk avoidance game where you try butter your bread on both sides. If you're short of butter don't eat the bread rather keep it in the fridge
So the traps to watch out for are: Withdrawal of funds, the types of banks they allow, the types of fees incurred - because like a good honeycomb it's easy to get your hands in but hard to get them out.
Local brokers also have pitfalls. One is for example "holding fees" - which they say is for holding your certificate safe. So what if one wants to have their certificate on hand? Why pay the fee? Other fees could be called account management fees - fees charged monthly just because you have an account with that broker. And are many other fees involved in buying local equity. The way to avoid them is also just solid calculation - and the result of the calculation it often becomes obvious that a fairly significant amounts of funds are needed to operate a profitable position.
However, it is not necessary to hold a direct equity position. Sometimes it is better to construct a synthetic cash position or trade warrants.
I do believe that a foreign position of some sort is absolutely necessary.
There are several ways of managing exchange rate risk:
1) Options.
Options on the JSE are unfortunately very much cast in stone and their expiry dates are here-and-there (maybe that suits people who don't transact very often)
Min contract is $1000, with USDZAR -the only one I know.
It works like this - you might want to pay a supplier in the future. That opens you to the risk that the rand will depreciate in the mean time. You buy a Call Option which expires around that time. If the price
2) Futures
$1000 JSE contracts which fix the future price of a currency (long or short) - however notice the brokerage fees to keep the account open during the contract duration.
3) FRAs
Did you know that your bank can fix your exchange rate sometimes between 21 day at least into the future with an ordinary instruction over the counter at your bank's FOREX department?
However, like the above contract you have to buy the currency at the appointed time. Either way, you want to manage uncertainty (risk) - and this does take the uncertainty away. The agreed rate will be a little higher than the spot rate (current rate)
Interesting point, how does the bank cover it's own risk? As you place the order to buy currency in the future, they go and buy it immediately using the spot rate and hold it for you. They are guaranteed to earn the difference between the quoted price which is a markup of the future price including interest.
4) Offshore deposit
Simply have the cash moved overseas when the exchange rate was good and keep it there to make payments from. (One way)
Investment is not a guessing game guys. It's really a risk avoidance game where you try butter your bread on both sides. If you're short of butter don't eat the bread rather keep it in the fridge
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