Discount brokers have gone a long way toward making life a lot easier for investors. But it's important to remember that brokerage companies are businesses, too, and they aim to get their customers to generate revenue in whatever ways they can.
With that as background, it's interesting to take a look at the latest trend among brokers. As stocks start to look a bit toppy, brokers are moving on to what they hope is the next big thing -- and they're looking to take their own share of the profits.
Going around the world
Discount brokers started out by opening the world of stock trading to average investors. Now, they're looking to open up another part of the trading world: foreign currencies.
Last week, optionsXpress
optionsXpress isn't the only broker getting into forex. TradeStation
Nobody wants dollars
Why are brokers turning to forex? Because that's where the action is -- and it's also becoming more important to traders as a means to protect their portfolio values.
- In the past two years, the Australian dollar has risen from being worth less than $0.65 to nearly $1.10 today.
- In 2004, $1 would buy you almost 1.40 Swiss francs. Now, you'll only get 0.86 francs. Similarly, a dollar buys only 81 yen today, down from more than 120 in 2007.
- In less than a year, the euro has risen from $1.20 to almost $1.50, and some believe it will head for its historic highs around $1.60.
When you consider those U.S. dollar losses in the context of the stock market's recent gains, it makes your lofty returns a lot more sobering. To a large extent, your investment gains have come at the expense of global purchasing power -- and if you were on the sidelines and out of the stock market, then you've actually lost ground in terms of most major currencies.
But where some see tragedies, brokers see opportunity. With those who've ventured into forex trading having benefited from a huge run-up in anti-dollar bets, forex is generating the buzz that often accompanies investing fads. And although the rise of currency ETFs like CurrencyShares Australian Dollar Trust
Playing with fire
The problem with forex trading, though, is that it can be extremely risky if you're using it to speculate on currency movements. Although betting against the U.S. dollar seems like a no-brainer given the federal government's lack of spending restraint, the amounts at stake with many forex trades expose investors to enough risk that even a modest correction can easily wipe out a trading account. If a full-scale trend reversal comes -- and many think the dollar is long overdue for a significant bounce -- then it could spell disaster for beginning forex traders.
If you have legitimate uses for trading forex, such as hedging international investments or simply looking to protect your dollar-denominated assets from further currency devaluation, then forex trading may be the right answer for you. But by giving you another way to speculate with wild price movements, brokers have to hope that ambitious forex traders won't wipe themselves out so soon that they don't generate the commission income that the brokerage companies want. That may work for them, but it's not a recipe for success for you.
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