Investors have been jumping headfirst into the world of Forex over the last few years, looking for opportunities to grow their wealth without having to deal with traditional investment vehicles like the stock market and real estate. Forex has a lot of advantages over traditional stock trading – particularly when it comes to a higher level of liquidity, 24/7 access to global trading markets, and a very easy barrier of entry to clear.
Nowhere is this more obvious than when investors are looking for an opportunity to earn dividends – or something similar – when they get into Forex. With that being said, does forex trading pay dividends?
Forex trading does not pay dividends in the traditional sense, like holding stocks would do. However, you can profit from carry trading. With carry trading, you’ll earn daily interest on holding a currency pair which is the closest you can get to dividends in the currency market.
Does Forex Trading Pay Dividends?
Dividend investing is a solid strategy that has made a lot of people a mountain of money in the stock market. And it’s easy to see why so many people new to the Forex world would want to take advantage of something similar.
Dividend payments basically incentivize shareholders to continue to hold a stock that they have invested in, rewarding long-term investments with “regular income” from these holdings that gets dispersed on a monthly, quarterly, or annual basis.
Does Forex trading pay dividends, though? Sort of.
You see, Forex doesn’t offer dividends in the traditional sense – at least not the same way that the stock market will – but there are opportunities to earn something similar in the Forex world by executing “carry trades”.
What is Carry Trading In Forex?
A carry trade is a very popular type of trade in the Forex world, but you have to actively trade to capitalize on this opportunity rather than hold your stock and earn the dividend passively.
The idea here is to earn daily interest on a long-term trade on a currency pair by daytrading those pairs, closing the trade at the end of every single day and then reopening them all over again – basically “carrying” the trade to cash in on these interest rates.
Here’s an example to better illustrate the concept:
Let’s say that you borrow $1000 that has a 2% lending fee attached.
Then let’s say that you go out and use all of that money to purchase an asset with a 6% return, giving you a total profit of 4%.
If you borrowed $1000 at 2%, bought a currency pair that paid 6% that day, and then cashed out the trade and then started everything back again the next day you be “carrying” the trade while pocketing the 4% return along the way.
Now, some currency pairs have higher yields than others.
AUD and NZD, for example, are particularly high-yielding currencies while the EUR in the USD are significantly lower yielding
A good strategy here would be to purchase lower yielding currencies (like the USD and that EUR pairs) and then sell the ones with high interest rates you’ll be able to make a decent profit through these carry trades.
The longer you hold trades the more profitable you are going to be, too.
Of course, it’s important to remember the role that leverage plays in a carry trade.
Let’s just say (for the sake of this example) that you open up a new Forex trade valued at $10,000.
If you have 1:10 leverage in place on the trade you won’t actually have to pony up $10,000 of your own money, but only $1000 – with your Forex broker footing the rest of the bill.
Instead of getting the daily interest rate carry profit on your trade for $1000 you’re getting a 10 time multiple of that thanks to the leverage – dramatically increasing your “dividend” payout through the Forex market.
Of course, you have to understand that anytime you introduce leverage into your trades the potential for things to go belly up and increase your risk (and potential that) skyrockets as well.
Be smart about these kinds of trades (even when you’re trying to something as sensible as carry trade) and you should be able to mitigate much of that risk and pull the chute before things turn into a real disaster.
The Difference Between Dividends and Carry Trading in Forex
So, does Forex trading pay dividends the way the stock market does?
Not really – but carry trading can offer something similar to dividend investing, with a whole host of advantages that investors are going to want to have a closer look at.
For starters, only certain stocks are going to pay dividends. This isn’t universal across the entirety of the stock market and you may or may not be interested in investing in the kinds of companies that offer dividends.
Carry trading, though, can be done on any currency pair at any point in time. If you feel confident and comfortable in a trade you can execute it whenever you want, ride it out for as long as you want and then close it out when you feel like the tide is starting to turn.
Carry trades also “payout” every single day, whereas most stock market dividends are only going to be paid out on a quarterly or yearly basis.
Add in the ability to use Forex leverage to dramatically boost your carry trade profits on a day-to-day basis and you don’t have to worry about dividends being limited only to what the company behind the stock decides to set those payouts at.
All in all, carry trading is a bit of a sophisticated investment option in the Forex world but it doesn’t take much to master.
Do your due diligence, research your options, and paper trade with carry strategies before you jump right in and you should be able to future proof your real Forex investments as much as possible going forward.
In Conclusion – Does Forex Trading Pay Dividends?
In summary, forex trading does not pay dividends. However, carry trading can offer a very similar experience to dividend investing. You should understand that carry trading carries increased risk and major returns if you use leverage. If you do decide to adopt a carry trade strategy, make sure you do your due diligence and research all of the necessary information first!
If you have any experience in trading forex using a carry trade strategy, please do let me know in the comments down below – I’d be interested to hear your experience.