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Forex Compared To Other Investments
How Does Forex Investing Compare?
There are several methods of investing. The modern history of trading started with the wealthy, and large corporations, investing to build wealth. Investors needed substantial amounts of money to invest. The options for investors were very limited. Before Farmers started the first futures markets, the only realistic mode of investing was through stocks, trading commodities in the ‘real world’, or buying into a business.
Investing: The Impact of Technology
Technological advances improved access to the markets. At one time, investors called into brokerage houses that may make the trade hours later. The price could have changed drastically in that time. This made it impossible for smaller investors to enter the markets. They didn’t have the time to watch the markets, or the money needed to incite special attention from brokerage houses.
The biggest boost for individual traders has been the internet. This lets traders enter markets without the need of a broker ‘on the trading floor.’ It also opens markets that were previously closed to private traders, such as the oil futures markets and Forex markets.
Forex Compared With Stock Markets (Shares)
The stock market is the most volatile. There are no safe guards. Prices fluctuate based on subtle factors, such as a rumor or scandal. There are no ‘stop points’ or exit strategies. Individual investors with enough ‘clout’ can force a stock into an artificial inflated situation. The average trader will not get in at the bottom. They must guess whether it is a Bull or Bear market.
Stock markets require a long-term investment. Governments limit how much brokers can leverage, forcing investors to carry a large margin. Most important, if the stock stagnates, it can become impossible to sell. There are thousands of stocks which go long periods without a single trade.
Forex Compared With Futures Markets
These markets require a large investment for a matter of months. Everything can be traded on futures from livestock to oil, from electricity to loan interest rates. The theory behind the futures markets is simple. The investors give the producers money in advance. The producers create a marketable commodity. The producers bring the commodity to market and the investor trades their certificates for a profit.
The investor expects that the current price of the commodity is lower than it will be a few months from now. The producer is unwilling to invest their money for months, with the risk of losing it all. The producer is willing to take less profit in exchange for security.
The markets look good. The investor will see the returns within weeks, or months. The pessimistic view is that the futures market requires a large stake.
Forex Compared With The Bonds Market (Gilts and Bonds)
Bonds trade like the currency markets. There is no central trading floors or markets. The bond market is an ‘over the counter’ market. Only USA corporate bonds, and bond futures are traded on exchanges.
Trading can be done person-to-person, but is usually done through bond dealers. These dealers offer liquidity for investors, making it easier to trade. Bonds are traded based on their price at maturity, at the price of par, or 100.00.
A popular element of this market is the Mortgage Securities Market. These represent ownership interest in mortgage loans. Investors trade in private-label mortgage securities. There is an estimated $4 trillion in outstanding agency mortgage securities. These are volatile markets, and not something for the uninitiated investor to embark on.
Forex Compared With Mutual Funds
Mutual Funds provide the greatest rewards, and offer the highest risks. The main advantage is diversification. A person can spread their investments over several mutual funds, instead of pooling them all on one investment.
Before investing in these markets, request a Prospectus. This includes a statement of objectives, fees, and information about the funds management.
Forex Compared With Gold And Bullion Trading
Gold is the most traded investment. It retained value as a commodity for four millennia, and will continue to be the world’s most secure commodity. As the world’s supply of silver depletes, and supply continues to outstrip demand, it is becoming a serious investment.
The number one benefit of bullion is its ‘recession proof’ value. Even if a country’s currency devalues, food, heat, and bullion will always retain its value.
Forex Trading = Currency Trading
The Currency, or Forex Markets are the most promising. The Forex market is the most liquid in the world. At any time, an investor can liquidate their entire portfolio without having the slightest effect on the market. In fact, a Central Bank can unload their entire stock of a single currency, and not make more than a ripple in the market.
Currency trading is considered a high risk, volatile market. This is true, to a point. The problem with currency trading is that forex trading must be treated like a full time job. It is not for the passive, or casual trader. Anyone who wants someone else to do the hard work, should consider another form of investing. Entrepreneurs, or people who want to control their own destiny, will love the Forex markets.
The Forex market is unlike any other market in one aspect, forex investors can liquidate their position at a preset stop point, determining exactly how much risk tolerance their portfolio will manage.
Balancing Forex Wealth Generating Capabilities against Risk
The Risk Pyramid is an unofficial guide to picking an investment vehicle. The investor must balance their ability to absorb losses, against their wealth building goals. The higher the risk, the more reward:
- Highest risk: Options, futures, collectibles
- Mid-risk: Real estate, equity/mutual funds, stocks, high-income bonds, debt
- Safest investments: Government bonds, secured debt, money markets, Notes, Bills, Cash and Currency.
The pyramid is not created to warn investors off some investments. The purpose is to help investors create a portfolio that meets their goals without exceeding their risk tolerance. Not every investor is an aggressive trader. Some investors have enough liquid investments to let them risk losing if there is a reasonable expectation of profit.
Most of today’s investors are padding their retirement fund. Every loss of their ‘stake’ can have a serious impact on their futures. They need a relatively safe investment, that will build a steady income. A few investment venues promise this. Currently the most popular one is Forex trading.
The Time Factor
The Risk Pyramid is only part of the calculation. The time factor is also a vital element that defines which investment is right for each investor. Many investors cannot hold investments for months. This is evident in the stock market where traders continually flip stocks. Not all investors can wait a decade, hoping their investment will offer adequate returns.
On the flip side, not everyone can handle the fast paced volatile currency markets. The concept of watching charts and setting, and resetting entry and exit points is too stressful.
Capital Stake (Bankroll)
The amount of liquid cash an investor has is not their ‘stake.’ Realistically, the stake is the amount of money an investor can risk losing. This is a fundamental aspect of the investor’s Risk-tolerance strategy. Determining how much money an investor can afford to risk depends on their net worth. Take the assets, subtract the debt, subtract depreciation, and subtract management expenses.
Many investors with $10 - $100 000 in the savings or other bank financial products are surprised to find that debt, management costs, and depreciation eats up most of their ‘net worth.’ These investors may only have 10% they can afford to lose.
The realistic investor needs to determine their risk tolerance factors such as time, net worth, and their goals. Once they have these factors well mapped out, they can determine which investment strategy works best for them. Many investors realize that they cannot start investing safely at the moment. This is okay, it gives them time to explore the markets and learn everything they can to reduce the risk and increasing the chances of building real wealth.
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