Forex trading is legal in the UK and is FCA regulated, but that doesn’t mean it’s free from risk – far from it.
What is Forex Trading?
Forex trading is short for ‘foreign exchange’ trading. It’s the process of trading in currencies, where people buy one currency and sell another with the aim of making a profit. With forex trading, you’re essentially betting on what you think will happen to each currency.
For example, if you think that the US Dollar will increase in value against Pound Sterling, you might buy US Dollars with the Pound, in the hopes that your prediction will prove true. If you’re correct, you can then sell your Dollars back for more Pounds than you originally bought them with.
High Risk
Forex trading is a high risk investment, as currency prices are very volatile and their values shoot up or down rather quickly.
Additionally, with forex trading, you can use something called leverage, wherein investors can borrow a certain amount of money from a broker to trade more than they actually have available themselves. So, you can put down a proportion of the full trade amount and the broker will cover the rest, allowing you to make bigger trades. This means that losses can be greatly magnified.
“While out margin requirements, closeout levels and real-time margin system are designed to limit your trading losses, you do risk incurring losses greater than your account balance, especially during periods of extreme market volatility.” –Forex
Forex Scams
Forex scams have become increasingly widespread, with unauthorised forex trading and brokerage firms offering opportunities to trade in foreign exchange, cryptoassets, and other commodities. These unregulated firms often falsely promise high returns and guaranteed profits.
Many people who have fallen victim to forex scams have reported to the FCA that they initially received some returns on their investments with these scam firms. These returns help these scammers solidify their position as legitimate firms, and gives the impression to victims that their trading has been, and will continue to be, a success.
This technique from scammers helps them to encourage victims to invest even more of their money into the scheme, as they are now more trusted to bring profits. At this point, the investor stops receiving returns, their account is suspended, and they are unable to get in contact with the firm.
Oftentimes, we are advised that if something seems too good to be true, it usually is, i.e, if an investment opportunity is offering guaranteed profit, or claims that it will make you rich quickly, it’s probably not a legitimate investment.
This is a good rule of thumb to follow. However, some scammers have become wise to this, and have adapted their techniques, with some making more realistic offers in order to make themselves seem more legitimate.
Additionally, you should check that they appear on the financial services register, and that the contact details and website information are the exact same as they appear on this register. The reason you should do this is because of the existence of clone firms.
Clone firms are a technique used by scammers, where they pose as a pre-existing, legitimate, FCA authorised firm. They may use the legitimate firm’s name, firm registration number, and address.
In the last quarter of 2023, the FCA issued 793 alerts about unauthorised firms and individuals, 6% of which were related to clone scams, showing that this is now a widely-used scamming technique.
by Red Star Wealth
Due to the success of open banking, it’s likely that we will see the development of open finance in the near future.
Open Banking: A Success Story
Open banking involves granting a third party access to your bank account. With your consent, this third party can access your payment account data and ask your banking provider to make transactions on your behalf.
The October 2021 Open Banking Impact Report found that 55% of Open Banking consumers agreed these services had helped them reduce their fees and costs and that 83% were willing to expand their use of these kinds of services.
On the whole, open banking seems to have been largely successful, and this has now opened the door to expansion into open finance.
Open Banking to Open Finance
Both open banking and open finance operate on the idea that individuals should be in control over who can access and use their financial data.
Open finance is simply an extension of open banking; it would enable wider sharing of this consumer data to more financial products and services, rather than it being confined to banking. So, rather than this data sharing solely involving things like payments, under open finance, it would also be applied to things like investments, insurances and mortgages.
The FCA’s Definition of Open Finance
Encouraged by the success of open banking, the FCA, government, and financial services industry have been considering the potential benefits of open finance… but what exactly is it?
[Open finance] is based on the principle that financial services customers own and control both the data they supply and which is created on their behalf. Re-use of this data by other providers would take place in a safe and ethical environment with informed consumer consent. This would mean that a financial services customer who consents to a third party accessing their financial data, could be offered tailored products and services as a result. Access would be provided by that customer’s current financial services provider under a clear framework of consent
How Might this Work in Practice?
Open finance would work on the foundation already established by online banking. It would work in a similar way, through data sharing to third parties, but it would simply cover a wider breadth of circumstances by collaborating across various financial services. According to UK Finance, this could potentially, “reduce fraud, improve financial wellbeing, widen access to credit, deliver greater choice in payments and help enable reusable digital identities.”
So, let’s have a look at a few examples of how this may look in practice for its consumers…
With open banking, consumers can see all of their account balances on one singular dashboard. With open finance, more financial products could be incorporated, so that the consumer could see their ISA, pension, mortgage, investments, and so on, all in one place.
Open finance also allows for even more personalisation. One example of this is lenders being able to offer mortgages based on the customers’ exact needs. Their service to the consumer would be personally tailored to them as an individual through data analysis of their accounts and finances.
Whilst open banking allows its users to authorise third parties making payments on their behalf, open finance could go even further, allowing consumers to link automatic transfers between different financial products, such as establishing recurring payments to pay off their mortgage.
by Red Star Wealth
Before undertaking any investment or other financial decision, it’s important to be aware of all of the potential advantages and drawbacks. So, let’s have a look at the advantages and disadvantages of investing in AIM shares.
What are AIM Shares?
AIM stands for Alternative Market Investment. It is a submarket of the London Stock Exchange which deals with small and medium size growth companies which are seeking to raise capital through an Initial Public Offering.
The listed companies tend to be smaller and more speculative as regulations are rather relaxed compared to larger exchanges. This type of investment tends to be higher risk with the potential of higher rewards.
Advantage: Potential of High Rewards
One advantage of AIM shares is the potential of reaping high rewards from your investment. The companies listed on AIM are still relatively young and in their growth stage, meaning there is the potential to earn more money off them than the mature companies on the FTSE index.
A prime example of this is ASOS: listed on AIM in October 2001 at the price of 20p a share, these ASOS shares later reached £71 a share by October 2014. You can click here to see their current price per share.
Advantage: Tax Benefits
Tax benefits are one of the main draws of AIM share investment. Some of these tax benefits include:
No stamp duty land tax (SDLT) due on shares traded within AIM
Some AIM companies are inheritance tax (IHT) free if shares are held for longer than two years
Some AIM shareholders may qualify for income tax and capital gains tax (CGT) reliefs when held through an Enterprise Investment Scheme (EIS) or through CGT Entrepreneurs Relief.
You can click here for a more detailed guide to AIM tax benefits.
Disadvantage: High Risk
AIM share investment is best suited to those who are willing to take on a high degree of investment risk. This is because many listed companies on the AIM index are still in their growth stage and aren’t fully established, meaning you don’t know whether they will be as successful as expected.
As stated by Andrew Howe on Interactive Investor, “AIM is the world’s worst-performing major stock market index of 2022.” He continues, “The number of AIM companies worth more than £1 billion has nearly halved over the past year. All the companies that are still valued above that level have lower share prices, some up to three-quarters lower.” This said, he does also note that there is the potential for a rebound this year.
Disadvantage: Illiquid
Listed companies usually have fewer outstanding shares available to be traded, meaning it can be difficult to buy and sell them at the price you want to.
It tends to be harder to sell AIM shares than those of larger companies, meaning you’re essentially more tied into your investment.
Overall, it is up to you to decide whether AIM share investment is right for you. However, before jumping in head-first, make sure you are fully aware of what you are investing in and how it all works.
by Red Star Wealth
One million people in the UK are part of a share save scheme, but what exactly are they?
An Introduction to Share Saves
You may see share save schemes referred to as Save As You Earn (SAYE) or employee share ownership schemes.
Introduced in the UK in 1980, share save schemes help you save towards buying shares in the company you work for.
For a company to participate and offer this scheme to its employees, it must be (or be owned by) a public company listed on a stock exchange.
How do they Work?
You save directly from your wage and then at the end of the savings period you are given the option to buy shares in your company or take your savings in cash.
The company will give you an option price, which is the price you will be able to buy shares for at the end of the scheme.
You can save up to a maximum of £500 a month under the scheme. The amount you opt to save is then fixed every month. So, if for example, you opt to save £50 a month for the duration of the scheme, you can’t then increase this to a contribution of £200.
The company may set an eligibility period wherein to join the scheme, you must have worked for the company for a minimum length of time.
What do you get?
As we noted earlier, you can take your savings as cash or as shares in the company. However, there are a number of options and combinations as to how you can do this:
Take it as cash. Here, the scheme has been used as a savings account of sorts. With this option, you will get back every penny you put away into the scheme. However, the money will not accrue any interest whilst sitting in the scheme, unlike how it would in an ordinary ISA
Buy and sell the shares. For example, you may choose to do this if the share price has risen above the option price given to you at the start of the scheme, so buying and selling the shares allows you to immediately make a profit
Buying and selling some but not all of the shares
Buying some shares and taking the rest as cash
You have 6 months to make this decision, so you don’t need to choose as soon as the scheme comes to an end.
You will pay no income tax or national insurance on the difference between what you paid for the shares and their value, but you may have to pay capital gains tax if you sell the shares.
What Information should my Employer give me?
Your employer will usually extend an invitation for you to join the scheme a couple of months before it begins. They should disclose the following information to you:
The scheme’s length, which will be either 3 years or 5 years
The deadline for signing up to the scheme
How much you can save each month. Under share save schemes, you can save between £5 and £500 a month. However, your employer may have their own rules, where they have increased the minimum payment you must make, lowered the maximum payment you can make, or a combination of the two
The price you can buy shares for at the end of the scheme. This price is set at the start
Is this Right for Me?
Whether share saves are right for you is a personal decision. If you would only want to take the savings as cash at the end of the scheme period, a savings account is probably a better option for you, as you can benefit from savings growth via interest.
Additionally, if you are struggling with debts or need to focus on building an emergency savings fund, it’s probably worth prioritising this over share saves.
However, if you do have a bit of spare income each month and want a low-risk form of investment, share saves may be a good option for you.
by Red Star Wealth
New rules from the FCA mean first-time crypto investors will have to be offered a ‘cooling-off’ period, ‘refer a friend’ bonuses will be banned, and advertisements must have clear risk warnings.
New FCA Rules
As of 8th October 2023, those marketing cryptoassets to UK consumers will be obliged to offer a 24-hour cooling-off period. This means that new crypto investors will have to wait 24 hours before they can complete their transaction- if they change their mind, they can get their money back.
Sheldon Mills, Executive Director, Consumers and Competition at the FCA, has said:
“It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice”
Under these new measures introduced in October, ‘refer a friend’ bonuses will also be banned, and those advertising crypto will have to include clear risk warnings and ensure their adverts are clear, fair, and not misleading.
FSCS Consumer Research: Attitudes Towards Investing in Cryptocurrencies
According to FSCS research:
91% of consumers with savings or investments say they’ve heard of cryptocurrencies, yet only 11% have a good understanding of how they work… to find out more about what cryptocurrency is and how it all works, we have a blog just for you
80% of those with experience or open to investing cite reasons that can be grouped as being ‘swayed by the hype’ as a motivation to invest. In fact, 35% of all current, former or potential investors say friends and families encouraged them to invest… therefore, it’s significant that the FCA are banning these refer a friend bonuses, as some will invest in crypto just because those they know are trying to get them to
52% with experience or open to investing agree that they see crypto ads everywhere… given that these ads are so rampant, it’s more important than ever to ensure that any false or misleading advertising is cut out
23% would consider getting into debt to buy cryptocurrencies, increasing to 34% among under 25s and 29% of those with household incomes of less than £15,000… it could even be argued that part of the reason why people in debt are willing to buy cryptocurrencies is because it is advertised as a way to ‘get rich quick’. It can be easy to be misled into believing that crypto could be a way to get out of debt, but unfortunately, for many, it actually does the opposite due to its risky and unregulated nature
by Red Star Wealth
Cryptocurrency is a very high-risk investment due to its volatile nature. Some people make their millions and some lose every penny they have invested. The crypto market has just suffered another shock this month following the collapse of FTX…
What is cryptocurrency?
Cryptocurrency is any form of currency that exists virtually, using cryptography to secure its transactions. Cryptocurrency exists entirely within the digital sphere… it is not tangible.
In November 2021, the Bitcoin price was at an all-time high of $69,000 whilst just a year on, it has fallen to under $17,000.
Ether, the cryptocurrency of the Ethereum network, which is the second most popular cryptocurrency after Bitcoin, has followed a similar trend.
Ether also reached new heights in November last year, pricing at $4,800, whilst it has now fallen to under $1,200.
Why the Crash?
Crypto prices massively fluctuate and can drop in an instant in response to major crypto events like coins or exchanges crashing.
The crash in cryptocurrencies this month has been triggered by the latter, with the sudden collapse of FTX.
What is FTX?
FTX was a crypto-exchange company based in the Bahamas which allowed people and companies to trade currencies virtually.
The $32 billion company is now bankrupt.
Mismanagement
Sam Bankman-Fried resigned as CEO of the company on 11th November, being replaced with John Ray III who has previous experience at other companies of helping investors gain back losses.
John Ray III said that FTX had faced “unprecedented and complete failure of corporate controls”, with a lack of regulatory oversight and sufficient record keeping. The company failed to keep proper records or security controls for the digital assets it held on behalf of its customers and turned to software to hide their misuse of customer funds.
He also said that a “substantial portion” of assets held by FTX may be missing or stolen and that corporate funds had been used to buy homes in the Bahamas as well as other things for employees.
There are also reports that Bankman-Fried may have used FTX consumer deposits for trading on his crypto hedge fund, Alameda Research.
FTX is currently being investigated by the US Department of Justice, the Securities and Exchange Commission, and police in the Bahamas.
Binance’s Cold Feet about Acquiring FTX
FTX was originally set to be acquired by its rival, Binance. However, after looking at FTX’s books, Binance announced its withdrawal from the deal earlier this month.
