What causes currency fluctuation in the global market? If you have off-shore investments, here’s how currency fluctuation may affect your earnings.
Nothing is more frustrating than investing your hard-earned money into an investment that doesn’t quite pay off. This is especially true when you’re depending on the global market and currency fluctuation comes into play.
Understanding the nuances of fluctuating currency can help you safeguard your investments and make sure you aren’t caught off-guard by sudden swings.
Keep reading to learn what causes global currency fluctuations and how your earnings are impacted.
An Example of Currency Fluctuation
Investing in international markets can be lucrative, but it also comes with an added layer of knowledge not needed when only one currency is in play.
Let’s say you invest $5,000 in a US-based company, or 100 shares at a cost of $50 each. The shares do well and within a few months, you decide to cash in on your profit and sell. The shares are now worth $60 each, and you make $1,000 on your initial investment.
Now let’s say the same deal took place in an international market, and you invested in a Japan-based company. The stocks are listed at 5,000 yen each, and the exchange rate at the time of your investment is 100 Japanese yen to every US dollar. If you divide the price of each stock (5,000 yen) by the exchange rate (100 yen), you’ll come to the price per stock in US dollars ($50). In this case, that works out to the same 100 stocks for a $5,000 price tag.
If the stock repeats the same increase as our first example, you will expect the same $1,000 payoff. However, because of currency fluctuations, the exchange rate of the yen has also gone up to $120 per US dollar. When you divide that $6,000 you receive at selling by this new rate, you’re back to your original $5,000 investment, even though your stock technically earned.
Keeping Your Eye on Currency Fluctuations
Currencies change in response to global and local events and trends in international markets. While currency fluctuations can mean losses you weren’t expecting, like the example above, it can also mean gains if you know how to keep an eye on exchange rates and trade-in at the right time. And international stocks help diversify a portfolio.
The main thing to keep in mind when deciding whether to invest domestically or internationally is that internal investing comes with an added layer of decision making and research. Not only do you need to understand the stock you’re investing in, but you also need to have a firm grasp on the performance of the currency you’ll be buying in.
A good way to do this is to do research with a currency strength meter that can help you watch currency trends over time. Check out this guide from forexearlywarning.com for more.
Understanding Currency Fluctuation
Now that you understand currency fluctuation and how it will affect your investments, it’s time to start watching those currency exchange rates so you can make better international investments!
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