What to Trade? Forex or Stocks?

From my research so far, I found it’s not that easy to find a perfect investment that throws off lots of passive income. As I’ve written in the past, I’ve thought about buying real estate, owning vending machines, a jewelry and art kiosk at the mall, and an online store. Whew!

Upon closer inspection, none of these investment ideas are as passive as I had hoped.  They aren’t a great way to invest for where my family and I are at today and I’m still searching for other options.

Some friends in my circle say they dabble a bit in stocks and forex trading with spare money.  Jess, a single mom whose kids are a little older than mine, says she’s made some tidy stock trading and forex trading profits.  That’s why I want to consider stock trading and forex trading as a way to grow my own capital.

Stock Trading vs Investing

Here’s what I’ve learned so far.  Stocks can be a great financial asset if you can leave your money in the market for an indefinite period. From everything I’ve read and all the research I’ve done, stocks tend to outperform almost every asset class over the long term.

My father said, “You can lose money if you do a lot of short term trade so think of it this way. It’s not market timing but time in the market that’ll make you rich!”  He said most people invest money in stocks for their golden retirement years that seem so far off. For instance, my mum’s AUD 10,000 investment in 1985 has grown to more than AUD 185,000 today! This is stock investing, not trading—nice one!

Stock Trading

Some people prefer stock trading to go after higher short term profits. Instead of focusing on established stable and mature companies, they put a lot of their portfolio into volatile high growth small cap stocks in the hopes of cashing in on large short-term price movements.  Sometimes stock traders even use leverage (borrow money) amplify these trading profits.

Here’s what I mean. Instead of investing in Aussie big capitalization stocks like Rio Tinto, BHP Billiton, Telstra Corporation, or National Australia Bank, they put some money into smaller cap stocks like Liquified Natural Gas Limited or MEO Australia Limited.  Smaller capitalization companies usually have fewer shares outstanding. When traders buy more shares than they sell, the smaller number of shares on hand can drive share prices higher.  Of course, so-called small cap stocks can be perceived as riskier stocks, too.

Stock Investing

I’m looking for consistent passive income and don’t have really have the time or inclination for high risk trading.  If I were to buy stocks, I’ll probably want to invest in more established companies that pay consistent dividend income. I’d choose stocks that have paid dividends for a long time, too, because it seems like these stocks would be more reliable.

That puts me in a different category of investors than my friend Jess. She’s willing to roll the dice when she buys stocks. I believe she’s a stock trader.  I’d only want to buy stocks that pay dividends. I don’t want high fliers because the risk is too high. As it turns out, the stodgy big companies Jess avoids pay the highest dividends!

Cons of Stock Investing

At the same time, I still have some reservations about direct stock investing.  The thought of losing money even in established stable stocks makes me think it might be wrong for me.

Owning quality shares of a company whose sales and earnings increase over time should mean my shares go up over time. However, I won’t know when or if the company’s sales and earnings are going to increase on my schedule! I could lose money even in the highest quality companies.

If I need to cash out my shares at a time when the overall market isn’t doing well, I could lose capital!  What’s more, I don’t really understand how all of the “macroeconomic” factors, such as inflation, GDP growth, or interest rates affect markets or the stocks I might invest in. If I invest in a multinational business, stock price could even be affected by the value of different currencies in which the business makes transactions!

There’s a lot to understand! I had no idea that currencies can affect stock price!

Forex Trading

So, this brings me to reflect on forex trading. The forex market is the largest on earth and, for that reason, it’s an incredibly liquid and global market. Governments, businesses and investors trade in the forex market.  Moreover, there are many forex brokers with low minimum deposit requirements which means I could dip my toe into forex trading without risking a lot of capital.

There are fewer forex pairs choices to trade than individual stocks and, though fewer choices ought to make it easier and more likely for me to act on forex trading, I’d still need to do a lot of homework before committing to trading.

Our currency, the Australian dollar, changes in value in relation to other currencies. It doesn’t actually ever lose or gain value of its own accord.  My friends tell me that forex is actually less volatile than the stock market. I like that. However, I don’t really understand what causes one currency to trade higher or lower than another. Not really.

Yes, I get that the British pound suffered against the Australian dollar when the Brexit decision was reached. In currency pair terms, GBPAUD—above AUD 2.05 in June—is now at about 1.70.  But not even the British pound trades down in a straight line. If I’d had the courage to buy the GBPAUD pair when the Brexit decision was reached, there would have been up ticks in addition to down ticks.

There’s also the question of leverage needed to magnify profits in forex trading. Borrowing other people’s money is great if I’m making money, but what if I lose money?  I could lose a lot of money or even 100 percent of my investment if I make poor forex trading decisions.

If I could get over the concerns I have about using leverage to trade forex, I’d need serious trading advice. I’d want to spend more time than I do reading about current events and economics and, from everything I’ve shared, you know that the likelihood of this is small.  My free time with the kids is so precious. They seem to grow up more every single day.

Conclusion

Okay, so here’s where our open discussion comes in. You see that I’m risk-adverse. I believe that the most consistently profitable investors perform research. Perhaps many of them watch over their stocks and forex positions full-time.  However, I want to keep my job as a nurse. I probably can’t keep an eye on financial markets during trading hours. That’s too much pressure.

Now, when I compare financial assets like stocks and forex contracts to real estate, I realize that physical permanence of my asset might be an important consideration. After all, if the markets turn down stocks can go to zero, however, land and buildings will still be worth something.

If I compare stocks and forex to vending machines, I arrive at the same conclusion. People are still going to buy snacks from my vending machines. Even if I wanted to leave the business, vending machines are hard assets. I could sell them for cash if necessary.

Similarly, a kiosk business and inventory on hand seem more financially reliable. Even in the market downturn a few years ago, I could afford to buy a new bracelet or earrings to celebrate the day. My kiosk customers would keep buying even if they bought less.

All told, I believe I’d have greater control with an actual business or real property investment because, if I invest in stocks or forex, I’m really completely at the whim of the market. It can rise or fall and, if I need money to feed the kids or attend to an emergency, I could lose some or all of my money.

I also feel that there’s a greater potential to lose money in trading stocks or forex.  Although I like the fact that owning financial assets would allow me to become a relatively hands-off investor, I believe that forex and stocks aren’t the right investments for me right now.

What do you think? If you’re a stock or forex investor, I hope you’ll comment on this post.  Let me know how much capital you invested at the beginning of your stock trading or forex trading adventure. Please share!

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