Making Money Off Money; Day traders are now swapping currency, and some experts say their new game is not as crazy as it sounds.(Cover Story)

Byline: Barbara Tierney

It used to be that only the biggest banks traded foreign currencies. No longer. One of the most complicated and high-risk investments is now open to the little guy--and to bids as low as $250. The same class of self-directed investors who discovered daytrading in the 1990s are now making bets on the direction of the dollar, euro or yen that hold the promise of big gains--as well as wipeout losses.

It's no surprise that there's a demand here: foreign-exchange trading volume rings in at $1.2 trillion each day, dwarfing the New York Stock Exchange's average daily trading volume of $50 billion. While no one tracks how many retail investors are trading forex on the Web, the dozens of companies that offer online trading--including established names such as FXCM in New York and CMC Group of Britain--say traders from up to 100 countries are represented on their sites, and that volume is growing.

The number of U.S. clients has been rising for the past few years. New Jersey-based GAIN Capital launched a site in January called forex.com that is pitched to retail investors with limited forex experience. GAIN says that while 75 percent of the volume on its older gaincapital.com site comes from overseas, three quarters of the volume on the new site is from U.S. clients just getting into the market.

Why now? Compared with export-dependent countries like Germany and Japan, the United States has been relative-ly insulated from international currency movements, and its dollar has been the world's benchmark currency. But the falling dollar is now big news, and investors love a story. Moreover, in late 2000 Congress clarified the authority of the U.S. Commodity Futures Trading Commission to regulate forex Web sites, advertising and telemarketing--giving investors a new comfort level with currency, just as the bottom was about to fall out of stocks. All this "has driven individuals to look at the profit opportunities offered by forex," says Mark Galant, CEO of GAIN Capital.

A lure--and curse--of forex is that traders can leverage far more than they wager. Many sites offer leverage of 100 to one, meaning a client can put down $1,000 to get access to $100,000 in currency. In an extreme case, that means that if a trader bets the dollar will rise against the euro, and the dollar moves up 1 percent, the return works out to 100 percent--and $1,000 turns into $2,000. A move in the other direction, and the $1,000 is wiped out.

Experts are divided on the risks. Some argue that in the long run currencies are less volatile than stocks, and no harder to forecast. As a bet on the direction of a national economy, no currency has ever dropped 25 percent in a day, or imploded as rapidly and completely as an Enron or a Parmalat. In the wake of those scandals, many companies are meting out information more cautiously, making it harder to get the real "scoop" on stocks, says Sassan Ghahramani, chief operating officer at Medley Global Advisors in New York, who considers forex for individuals "a natural evolution for an educated society."