In our daily life, we have the opportunity to use foreign currency for saving, traveling, and investing. Therefore, a foreign currency account with freely convertible currency has become a necessity for many people. This article will introduce the functions of foreign currency account and the procedures for account opening.
It will also explain the differences between a general foreign currency account and a forex account, which is mainly used for currency trading.
The main functions of a foreign currency account
1 / Exchange foreign currency online
It is very convenient to exchange currency with a foreign currency account. All you have to do is convert your local currency into foreign currency online and make an appointment to withdraw at the counter. The online exchange rates and fees are usually lower than that of taking cash to the counter, saving the difference between the spot rate and the cash rate.
2 / Hold foreign currency for the long term
Foreign currency accounts are suitable for people who want to hold foreign currency for a long time. Banks often offer higher interest rates on fixed deposits denominated in foreign currencies than in local currencies, so holding foreign currencies for the long term can be considered a guaranteed investment
In addition, when the economy is declining and the exchange rate for domestic currency goes down, we will also need to purchase safe-haven assets, which is also what drives us to hold foreign currency.
3 / Earn spread
You can exchange the local currency held into foreign currency when the exchange rate of a certain foreign currency reaches a recent low and convert it back into local currency when the foreign currency rises, so as to make a profit. This is a typical type of investment. In this case, a foreign currency account can be used for long-term investment, while a forex trading account, which offers a lower spread, can be used for short-term speculation.
How to open a foreign currency account
Step 1: Select a bank
The most important thing is to choose a reputable bank to facilitate the transactions thereafter. A local currency account must be opened in advance if you don’t have one.
Step 2: Bring the required documents
You have to bring along your ID or passport and your proof of address to complete the verification. Some banks may also require you to deposit a specified amount into the local currency account when you open a new foreign currency account.
If you need to activate online banking, please contact your banker for details.
Step 3: Transfer the deposit into a foreign currency account
Typically the foreign currency account would be able to accept more than one currencies. It is important to note that the foreign currency accounts of many Banks only provide exchange and deposit services for major currencies and are not applicable to unpopular currencies.
You may be charged a handling fee if you deposit foreign currency directly into a foreign currency account. It is recommended to check with your bank in advance.
Difference between foreign currency accounts and forex accounts
As mentioned earlier, if you want a short-term investment/ speculation on forex, it is more appropriate to open a forex trading account than a foreign currency account in the bank.
To start trading forex, one needs to sign a contract with the broker to open a third-party trust investment account and deposits an amount as a guarantee (which is called margin). Then the platform sets an operable limit for the client, which could be a hundred times the principal (depending on the leverage). After that, investors can buy and sell forex spot of equivalent value within the limit of the platform, and the profits and losses will be calculated and applied to the principal in the account.
In the process of forex trading, the platform will charge a fixed fee for buying and selling forex to make profits, and of course, it will also make profits from the spread.
For example, the exchange rate of CNY/USD in the market is 7:1, but if you want to buy USD on the platform through margin trading, the exchange rate may be 7.01:1 or higher. In addition, platforms will also charge swap (overnight interest), which will all be shown in the account.
Comparison between foreign currency account and forex account
|Foreign currency account||Forex account|
|Short selling restriction||Only long||Both long & short are allowed|
|Settlement date||According to the certificate of deposit||None|
|Transaction fee||Set by the banks||Set by the brokers|
|Leverage ratio||1:1||1:100 or higher|
Generally speaking, the difference between a foreign currency account and a forex account is exactly the difference between the forex transaction as we have known and speculation in forex.
To put it simply, the forex transactions as we know usually happen in the banks and are done to meet individual needs such as traveling. Although forex trading is roughly the same thing in terms of the basic concept, there is a lot of differences between the two in actual operation.
There are five main differences between buying and selling foreign currencies and speculating in foreign currencies:
Forex accounts allow two-way trading
That is, you can make money not only by waiting for foreign currency to appreciate, but also by but betting against it if you believe the currency will depreciate. Short selling is allowed in forex speculation, which means you can sell the currency first without holding it. Traditionally, when you buy and sell foreign currencies in the banks, you have to wait for the depreciation of foreign currencies to buy and then wait for the appreciation of foreign currencies to make a profit. In other words, you have to hold the currency for the long term, which stretches the trading cycle
The cost of the forex transactions mainly comes from the bid-ask spread. The average bank quote sometimes can be more than 10 times or even 100 to 200 times higher than the quotes on the forex market, depending on the type of customer. The bid-ask spread offered by forex brokers is typically very favorable, as the frequency of transactions is high.
24 hour trading hours
The forex market operates 24 hours a day, even on holidays in some countries. Therefore, basically, all brokers that offer forex trading also allows 24-hour trading. At present, however, 24 – hour trading is not available in banks. A key problem is that the most volatile time for forex prices is usually from the evening to the early morning of Asian time, which is known as the North American session. So, the market entry price can vary a lot for forex transactions and forex speculation.
No physical delivery is involved
A major difference between forex speculation and selling and buying foreign currencies in the bank is that you don’t have to deposit and withdraw cash at the counter. However, if you really need to use foreign currency in your life, you still need to go to the bank.
More sophisticated trading tools
Most forex brokers are equipped with a fully functional online trading platform for customers to use, so that customers can open or close a position at any time, set the entry and exit price, and establish a set of trading strategies. These platforms will also come with a comprehensive charting function to help customers research the market.
Advantages of forex trading over other investment tools
As long as you deposit a margin, more than 100 times of available funds can be used. Since the fluctuation range of forex is relatively small, through margin trading, you can seize the opportunities in the forex market with a small amount of principal and dramatically increase your profits and earnings.
The biggest advantage of margin trading is that it can operate in both directions, which, compared with the stock market (allows only one-way trading), undoubtedly provides a more flexible operation strategy.
High liquidity and long trading hours
The forex market has a large trading volume and covers different time zones in the world, which makes the trading time almost uninterrupted. Compared with the stock market, the forex market not only has longer trading time but also has more profit opportunities.
Notes to new forex traders
The advantage of forex trading allows investors to make profits regardless of whether the market is going up or down, but the time to enter the market, and trading strategies are also crucial for making a profit. The accumulation of experience is the only way to success, and investors still need to decide the amount of investment according to their preference and capability as all investments have risks.
Margin trading can amplify profits due to the leverage effect, but the number of losses is also magnified, which is also the main risk of margin trading.
Since the forex market involves the currencies of many countries, the economic development, policy, and debt status of each country will affect the trend of its currency. In other words, forex trading puts a high requirement on the investors’ ability to collect and interpret information, which means it may be unsuitable for beginners.
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Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.