The rich getting richer, and the poor getting poorer. We keep hearing it, but why is it so? My understanding of it is that less than 1% of our population invests. Except for this business class, the average Pakistani household lives from hand to mouth. Given their circumstances, they can only fulfil the basic necessities and if they ever get to save, the traditional investment options are way beyond their range.
It is only now that low scale investment options are getting popular in Pakistan. After the crypto trend that was met with enthusiasm and criticism both, and the long-running stock market investment, another option is an investment in the foreign exchange market, usually termed as Forex trading or FX Trading.
What is Forex Trading?
As the name suggests, Forex Trading is the exchange of local currencies. You simply buy low and sell high.
Let’s go through this concept with an example. The most popular currency exchange in the forex world is Euro against US Dollar. As of today, 1 Euro equals 1.13 USD. Suppose you have 1000 USD in your trading account. You heard the news that Euro is expected to rise against USD today, you buy 885 euros from your 1000 USD. If the prediction turns out to be right, and Euro rises to 1.14 USD, you trade back your 885 euros for 1008 USD. Thus making a profit of 8 USD.
Leveraging to increase profits
So much struggle for $8, really? Nothing to worry about, there are ways to exponentially increase profits with the same capital. In order to maximize your profit potential, you’d have to leverage. Leveraging is when you invest someone else’s money, could be relatives or even companies that offer you money to invest and return the amount with or without interest as per the provider’s requirements. Companies offer up to 1000 times more loans than your original capital.
Borrowed capital increases your profit, but How?
Going back to the previous example, Suppose along with your personal $1000, you’re provided with a $500,000 loan. Now you get 443362 euros for your $501,000 total. If Euro rises to 1.14 USD from 1.13 USD, you get $505433 in reverse trading. After returning the investor’s amount you’re still left with a profit of $4433 on your $1000 capital, which is huge.
But not to forget, Leveraging brings a high risk of losses as it brings opportunity for high profits. If Euro falls instead, you lose profits, your deposit and even the investor’s loan. In case of investor’s loss, the trade remains open until the capital is recovered.
Before we get to the process of investing in Forex Trading or the platform offering it in Pakistan, some questions need to be answered.
Is Forex Trading Shariah Compliant?
Qur’an is very definite and clear in what it allows and what it restricts. However, with the advent of new technologies and trading channels, it becomes complicated to assess them in accordance with religious teachings.
Qur’an clearly prohibits gambling and riba ( usury or interest). Since both of these activities are associated with Forex trading, many scholars have argued that Forex trading is haram according to Islamic principles.
In order to tackle this hurdle, there exist Muslim forex accounts. There are companies that deal in interest leveraging forex trading but offer separate Muslim forex trading bases. Furthermore, there are companies dedicated to interest-free forex trading completely.
Forex brokers, in general, do business by paying or charging the interest differential between the two components of any pair of currency when the position holds overnight. In an Islamic setting, the brokers allow investors to hold their positions overnight without paying interest or the swap commission. The regular spot Forex trading accounts are for immediate buying and selling and have no overnight interest charges.
Thus it can be concluded that the Islamic Forex trading offering no interest charges and spot forex trading can be declared shariah compliant.
Is the financially naive population of Pakistan ready for Forex Trading?
Forex Trading is a good investment opportunity for the few financially educated, that have expertise in Investments and currency exchange rates. However, there are a few traits about the Pakistanis masses which make us quite not a fit for Forex.
- Most of us aren’t financially educated and diving into Forex Trading with no guidance or expertise in other forms of trading is too risky, and most likely a loss incurring investment.
- It takes one towards gambling. You gain profit once and keep experiencing a series of losses, keep losing money in hopes of a profit again.
- We as a nation are more informed about Politics than current affairs and the global economy, we don’t follow financial alerts as closely as this profession requires.
- Due to insufficient knowledge, most of us rely on technical analysis such as charts. This is called Scalping in which traders profit off small price changes for a stock. If not exited on time, this causes huge losses.
- In search for more profits, most people do over leveraging. In case of a loss, they not only loose all their personal capital but also get in debt.
- We tend to go all out when given a chance. However newbies should only be investing 1% of their capital in new schemes.
- The amount of Scams in this market are insane. Most brokers don’t close your deals when the profit comes and complain about liquidity and stuff. They delay the charts, manipulate the marketplace and put you into loss for their personal benefits.
Step-wise Process of investing in Forex Trading:
Now that we know the opportunities and risks of Forex Trading, you can make up your mind if it is for you or not. But whatever you choose, stick with us to get the basic knowledge of how to invest in Forex Trading.
- Stable Internet:
First and foremost, you must have a stable internet connection. Even a minute’s delay in this market would cause you huge losses.
- Research on the forex market:
As discussed earlier, it is a complicated market full of scams, you must be fully aware of how it works and what are the fraudulent strategies that bring you loss.
- Choose a reliable broker site or app:
Your success highly depends on your broker, it is preferred to choose an international broker. Forex Trading is quite unregulated in Pakistan, thus finding a certified reliable broker is hard.
- Select a platform:
You can choose to use the platform provided by your broker or use a broad and independent platform such as Meta Trader 4 or 5.
- Practice on a demo account:
Never start your Forex experience with the real funded account. All Brokers offer demo accounts with no investment, get your hands-on experience through these demo accounts first.
- Create your original account:
Now that you have the basic learning and experience of Forex, open your account. You provide your CNIC, address, nationality proof to your broker through email, in order to get your account credentials (email & password).
- Fund your account:
You would now fund your account by linking it to your bank account and converting rupees to dollars, pounds, or other currencies. Most traders in Pakistan choose to convert their native rupees to a more liquid currency like USD or EUR when trading forex.
- Monitor the market trends regularly:
You must not make casual guesses, you should always be following news and be right behind it. All your trades should be backed by past currency trends or predictions by economists.
Forex Trading brings immense profits, with the slightest shift in currency values. A small amount of capital can bring huge profits given leveraging options. If you’re mindful of current affairs, have a strong financial background, and have high-risk tolerance, this is just the right thing for you. It offers easy earning, flexible working hours, and easy accessibility.
However, if currency exchange, stock market, non-asset backed investments are new concepts for you, Forex is probably not for you. You must start from asset-based businesses and Investments to get yourself financially educated before you step into Forex. The unregulated Forex market in Pakistan, the huge amount of scams and complex strategies make it a controversial investment option.
