Forex: Market Whales Swallow Small Investors

SadaNews Report: "Trading is fraught with risks and can lead to loss of capital," is a phrase that concludes a radio ad promoting one of the financial brokerage companies in Palestine, broadcasted across local radio stations. Although the ad seeks to attract investments from citizens, this sentence comes within the framework of a directive from official authorities emphasizing the need to remind about the risks of investing in the global currency exchange market, commonly known as "Forex," much like a cigarette pack warning stating "Caution, smoking may cause death or cancer."

What is Forex?

The Forex market is a decentralized global market for trading foreign currencies and is the largest and most liquid in the world, where currencies are bought and sold against each other. This market includes individuals, institutions, banks, and governments, and currencies are traded in pairs (such as Euro/US Dollar), where traders buy one currency while selling another simultaneously with the goal of profiting from the exchange rate difference. The market operates 24 hours a day, five days a week, due to the overlapping time zones of the major financial centers around the world (London, New York, Tokyo, and Sydney).

Financial expert Mohamed Salama tells SadaNews that the Forex market is the largest market in the global financial system with a trading volume reaching (8) trillion dollars daily, noting that the number of traders can reach (15) million traders.

Online trading platforms are available, and accounts can be opened electronically without any oversight, making the service accessible to anyone interested without restrictions.

Salama indicates that this market is thriving in declining economies or during recessions, as people seek alternative sources, pointing to the availability of analyses for currency exchange fluctuations based on several theories including economic, fundamental, technical, and quantitative analyses, which are widely available online. Despite their importance, it is difficult for the average person to benefit from them.

Open Market

Economic affairs journalist Imad Al-Rajabi tells SadaNews that the Forex market is large and open to everyone; therefore, even if it is licensed by official authorities, there is still the possibility of trading through unofficial methods.

He adds, "The lack of licensing for companies operating in this market by official authorities means a loss of taxes firstly, and secondly, it inhibits the ability to monitor operations within this market," pointing out that the non-licensing of these companies and the operations conducted within them means allowing money to leak into unofficial markets or formal markets in other countries. Hence, there is practically no way to stop dealing with these markets. On the other hand, licensing these companies means documenting oversight over them, which is essential.

Salama states that the Forex market is globally open; anyone interested finds the service available to all the inhabitants of the globe. It is legitimate trade needed by the business, investment, and hedging sectors. However, speculation aimed at making profit by individuals lacking expertise and relying on luck while facing market makers requires deeper thinking.

Science or Gambling?

Regarding how to deal with these markets, Al-Rajabi indicates in his conversation with SadaNews that financial transactions in the currency market are science, not gambling as some might think. One must possess the necessary skills to read the market first, and secondly, one should allocate a part of their surplus money to invest in the market rather than risking essential personal resources.

He believes many leave the market due to their lack of technical and economic expertise. He points out that if an individual does not have capital that protects them, calculated risk, and a deep understanding of the market, they will inevitably be exposed to loss and exit the market, unlike the stock market where buying (cash not CFD) is less risky and falls within the context of medium- and long-term investing.

For his part, Salama clarifies that the Forex market does not generate money; if one person makes a profit, it usually means another person loses money somewhere in the world. He notes that studies show that 95% of Forex traders lose their money, and only 5% may achieve profits.

He explains that the differing percentage results from the market structure and its dynamics; the market consists of market makers, brokers, trading systems or platforms, analysts, and consultants who earn from the market. Since it does not generate funds, what these individuals earn is generally lost by the traders, regardless of their intentions.

He concludes with the inevitable result that market makers possess expertise, competence, and information, making them more capable of achieving profits. "As long as brokers receive their commission, and since there are operating costs, this means that these costs are borne by traders, indicating that losses are distributed among the trader population; some earn temporarily, while others are perpetual losers, and occasionally, there are balanced traders.”

Salama mentions that there is investment in this market by countries and sometimes individuals, requiring real cash flow and currency exchange. However, simultaneously, there is speculation on exchange rates, which is the crux of the matter.

Initial estimates indicate that global market makers earn profits valued at (70) billion dollars daily, noting that some traders will inevitably incur losses, hitting close to (15) million traders daily.

Salama questioned, "After all this, the question remains: how will small speculators profit, and where will that profit come from?" He continues, "Luck and sustenance are with God, but scientifically and mathematically, one cannot leave with their money unless granted mercy by God; this is a fact," pointing out that substantial economic and investment sectors enter the Forex market such as banks, often having high-level risk management, which leads them to achieve high profits, unlike small investors.

The Palestinian Capital Market Authority tells SadaNews that investing in foreign exchange markets (Forex) and trading in metals involves a high degree of risks that may not be suitable for all investors. Among these risks are:

First: Leverage Risks: A two-edged sword that allows traders to open positions exceeding their actual capital, which can amplify both profits and losses equally.

Second: Market Risks: The Forex markets are characterized by their extreme volatility, and currency prices are constantly influenced by a wide array of factors that are difficult to predict.

Third: Counterparty Risks and Unlicensed Entities: These risks relate to two main aspects:

A- With the broker you deal with; if the broker is unregulated or facing financial difficulties, you may encounter issues withdrawing your money or may not be able to recover it at all in the event of the broker's bankruptcy.

B- Dealing with unlicensed companies not subject to the oversight of the Palestinian Capital Market Authority.

The authority emphasized that dealing with licensed companies is the primary and fundamental guarantee for protecting investors' funds and ensuring a safe and fair investment environment.

The authority indicated that its approach to licensing companies operating in the Forex market primarily aimed to control the black market, stop the waste of money from the Palestinian market, and combat fraud operations in this market. It pointed out that the intervention to grant licensing was not without reason, but aimed at regulation and stopping this leak. It highlighted the urgent need for regulation amidst the prevailing chaos, affirming that the decision to enter the Forex market is an individual decision, not open for companies, and that the authority has set conditions and determinants on the leverage process, along with a central safeguarding process and oversight of all trading operations conducted by investors. Regarding taxes, the authority clarified that there is no value-added tax imposed since the trading operations are carried out through a foreign financial intermediary, while companies are obliged to pay income tax on both their profits and the earnings of employees in the sector. Therefore, the authority sees benefit in licensing these companies both in terms of labor utilization and opening new investment tools with global markets, affirming that the licensing aims to organize procedures and protect investors dealing with companies that are under the authority's oversight and systematic supervision.

Complaints and Reports of Traders Being Subjected to