The foreign exchange market is so attractive to so many people because of two things:
First, it allows an individual to have an opportunity to earn a lot of money with only a small investment. The entry cash to participate in the market can be as low as $25.
Second, it only takes a computer or laptop with a reliable internet connection to access a market that trades daily in billions of dollars worth of the world’s top currencies.
Of course, these must be predicated on the trader having a technical understanding of how the foreign exchange market works.
For new traders or those interested in entering the market, some obstacles have to be overcome, especially those from the United States. Those who succeed at trading are usually those who find an offshore forex broker for US investors.
Offshore brokers are simply the better option for many Americans that find US regulations too restricting for their trading goals. What are these restrictions?
At present, all forex trading in the US is regulated by two institutions: the National Futures Association (NFA) and the Commodities and Futures Trading Commission (CFTC), both known for having more stringent regulatory measures when compared with other regulators in other countries.
One such stringent regulation is found in leverage. According to NFA and CFTC rules, US citizens and residents can only have a maximum leverage ratio of 1:50, which is about two percent of the total contract. This ratio is higher than what is available in the stock market, which is only a merely 1:2 leverage ratio.
In other words, leverage is the way that investors increase the potential returns of their investment. A brokerage lends an investor a certain amount of money for that investor to take a position in the market. A position is the actual amount of money possessed by an investor or a corporate entity that will be exposed to the market. Anticipating the increase or decrease in the price of paired currencies is what taking a long or short position is all about.
In forex trading, using a position together with leverage is the means of gaining profits. Profit is realized when a trader understands the fluctuations of exchange rates between the currencies of two countries. Imagine having a leverage of at least 1:100 up to 1:2,000? This apparent advantage in leverage is only possible through an offshore forex trading account.
Trading on US soil also does not allow hedging due to a First In, First Out rule, or as it is commonly referred to as FIFO. Making a position on more than one pair of currencies is not permitted. That, however, is possible through offshore trading.
Aside from having to provide tax information, the administrative requirements for trading in US territory are simply unacceptable to many who want hassle-free investing. Even if regulators require a long list of requirements to ensure safe trading, using one’s credit card is still not allowed. ; These measures make entering the market too complicated and time-consuming for most investors, big or small.
These are only some reasons why market players are looking elsewhere to create forex accounts and not in the US. Of course, offshore forex trading is allowed for US citizens and residents as long as they inform the Internal Revenue Service (IRS).
These are the clear advantages of offshore trading:
1. Better Trading Options
As mentioned earlier, trading outside of US territory will allow an investor to enjoy stronger leverage.
2. Less Hassle
With fewer requirements and more manageable ways to open an account, an offshore trading alternative is hassle-free. Fewer regulations and qualifications mean that there will be more flexibility available to an investor, whether that person comes into the market as an individual or as a corporate entity.
With fewer requirements come more freedom and more privacy in entering into the market. Some accounts are managed by a professional on behalf of a principal who wishes to remain anonymous. The level of privacy afforded by offshore trading is another premium for availing of this type of financial service.
4. Lower Tax
With timely advice from a legitimate offshore forex broker, an investor can take advantage of a structure that allows significantly less tax requirement or even a zero-tax regime.
Offshore brokers usually manage corporate accounts that have more substantial holdings or deposits. That makes these types of brokers more highly respected and more in-demand in the industry. The level of trust and business integrity they need to maintain is also much higher. Being put to a higher standard makes these brokers deliver relatively better service and higher profits for the investor.