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Chapter 28 Part III. Continuation - Stock Market. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 27, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    But let’s return to popular theory. It tells you that if you want to invest in the stock market of some country – you need to purchase its currency first. I can’t disagree with that but still only partially. If you want to purchase a particular stock then this is really true, but what if you want to purchase the overall market, say Nikkei 225 – Japanese stock market? The one way how you can do it is to purchase all stocks of index in the same weight, or… you can invest in index futures – just buy 1 futures contract on Nikkei 225. And the truth is that you do not need yen for that. For instance, the Chicago Mercantile Exchange allows you to do this with US Dollars. Still, the truth is that liquidity and daily turnover in such futures are very small compares to Japanese stock market. The same is true for other stock markets.

    So, as we need to purchase currency first – this leads to growth of domestic currency of that country. If, for example Japanese stock market is booming – then more and more investors want to take part in this rally. This leads to higher demand for JPY and hence, its appreciation, compared to other currencies. This statement tells us, that if some market has good perspectives by investors’ opinion and feels well – this is a sign of strength of domestic currency. At least this currency should not become weaker, because more investors join up their money. Even if you do not want to trade stocks – to keep an eye on it is not bad idea.

    The second statement of this well-known theory is if some stock market performs better than the other, then, probably sooner rather than later it will launch the same dynamic with currencies.
    #1 Sive Morten, Dec 27, 2013
    Lasted edited by : Oct 8, 2016
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