If instant gratification is your thing, hot money could be right up your alley. Granted you’ll need to know a bit about international local economies. So, what exactly is hot money? It’s a strategy used by investors, who control specific funds to seek short-term returns.
Below is an overview of how hot money works and any impact it may have.
As mentioned above, the hot money strategy is a term used by investors who are looking to make short-term gains. This is done by regularly moving capital between different economies and financial markets. As a result, making profit from the highest short-term interest rates.
In simpler terms, investors move their money between countries all based on how the local economy is doing. To clarify, the health of a local economy is usually reflected in their current interest rates. Changes in currency values may also be used for gain. Investors are most likely to buy that said currency. Then they put their money in a local bank.
Money moves quickly between countries. Never staying in one place for long. It moves fast and can be unreliable.
Domestic hot money is the same as international. Except for the fact that it doesn’t move between countries. Funds are transferred between domestic banks. These funds move quickly, just as international hot money. Furthermore, these investors look for the best rates between banking institutions. However, domestic hot money is rare. The term typically refers to global finance.
Hot money can have a real impact on economies. This can affect a countries exchange rate and capital flow.
When investors buy up currency there are two things that occur. First, it will drive up the value of that currency. In turn, helping import trading but hindering tourism and exports.
In addition, hot money can bring fleeting capital into a country. For example, when investors bring money into a bank, that said bank will have increased capital. Subsequently allowing the bank to spend or invest. This can go either way. In other words, any excess capital can cause inflation and possibly asset overvaluation.
In addition, withdrawing funds can devalue the currency. Furthermore, helping tourism but hindering the import sector. As a result, it weakens that part of the economy.
Some countries have laws making it difficult to move money in and out. Consequently, investors are unable to move at the speed needed for this investing strategy to work.
You don’t need to be to a global investor to make money in the markets. A financial advisor or online investing site may be just the right fit. Ready to leap into the market? Take a look at our top investing sites which are detailed here.