How forex trading differs from a pyramid scheme

What is forex trading?

A practice that has become quote popular in recent years as an investment option is forex trading, which has gained much interest all over the world. Although different countries regulate the practice in their own ways, it remains an appealing idea to many in various parts of the globe. Forex trading is said to be the largest and most active financial market currently, as it allows people to capitalise on currency fluctuations that result from global, economic and political conditions. Due to the fact that it involves the buying and selling of global currencies from different countries, the stability or lack thereof of one country will either positively or negatively impact one’s investment, depending on whether or not the conditions and market changes are in the trader’s favour.

Both novice and experienced traders generally lean towards investing in safe haven currencies and popular forex currency couples. Amongst some of the world’s most popularly traded couples are the USD/EUR, USD/GBP and USD/CAD.

What is a pyramid scheme?

In light of the growing interest in alternative ways of making money, other than a traditional job, opportunists have also come to the fore and initiated get-rich-quick schemes, amongst them being pyramid schemes. Simply put, a pyramid scheme is a form of investment, which is unregulated and sometimes illegal, that sees so-called investors paying a joining fee and then recruiting others in order to supposedly earn a portion of their joining fee. During the recruitment process, potential participants are often promised considerable returns on their money based on the people they are expected to recruit. However, pyramid schemes are often quick to fold and result in many people losing their hard-earned money and, in some cases, their life savings.

How the two differ

Due to the potential to make substantial returns from forex trading, some people are very sceptical and have likened it to a pyramid scheme. However, based on the definitions above, it is quite clear to see that the two are distinctly different. That being said, some suspect traders may adopt a pyramid-scheme like approach to forex trading, which has made many people wary, however, at its core, forex trading is not a pyramid scheme. Below are some additional differentiators between the two practices.

Return on investment

Pyramid schemes promise high returns from the get-go, while forex traders are well informed of the potential losses before participating in the financial markets. The former uses high-profitability as a selling point while the latter emphasises practice, consistency and an understanding of the financial markets for best results.

Recruitment process

Pyramid schemes require so-called investors to recruit as many people as possible, who each pay a joining fee, while forex trading does not require that. One can make a success of forex trading through using a credible and experienced broker, while one supposedly earns from the joining fees of the people they recruit in a pyramid scheme

Compliance with regulations and authorities

Pyramid schemes are generally fraudulent and do not adhere to the guidelines set out by the financial authorities in various countries. Therefore, such institutions are often devoid of the required documentation that proves their eligibility to operate within the financial sector. On the other hand, forex trading is a legal practice in many countries, however, each country has its own compliance criteria and guiding regulations to ensure that no fraudulent activity is conducted and that traders adhere to the governing laws.

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