Should you invest in stocks or forex? It is not the right question if you’re asking that question because you want to become financially independent. Financial independence is not based on what type of asset class offers the highest returns; it’s simply about having enough passive income, so you don’t have to work anymore.
Passive income can come from many places, including bonds and rental properties, but ultimately the vast majority of your net worth should be invested into equities.
Why personal finance through forex trading is fundamentally flawed.
One—there are almost no tax benefits unless you can prove that your forex trading was a full-time job.
Two—the retail forex market does not have much liquidity, so it’s difficult to enter or exit positions quickly and at reasonable prices (due to a highly fragmented market).
Three—the cost of trading forex is prohibitively expensive compared with other financial assets; this makes it harder for new traders to break even (let alone make a profit).
Four—most forex brokers don’t offer reliable technical support, making it hard to resolve issues that arise during live trading – especially if you’re trading on borrowed money.
Five—there is no direct correlation between currencies and commodities or between one currency and another, making it difficult to diversify your portfolio.
Six—you could be facing a looming currency crisis in one of the currencies you hold.
Seven—the forex market is not open on weekends – no trading for anyone who has to work!
Sounds dire? Well, there are many benefits too – mainly in terms of flexibility. Forex traders can go long or short on any currency pair at any time because they don’t need to wait for other traders to agree to the terms of the trade. They also don’t have to worry about how their actions will affect price and volume.
As we mentioned earlier, there are other ways to earn passive income that can supplement your regular income or replace it entirely (rental properties, private lending, etc.).
Investments should become more and more diversified because different asset classes offer unique returns and do not correlate with each other.
Although forex traders can keep their investment capital in “cold storage” (meaning away from the brokers), this also makes it much harder for them to enter and exit trades quickly – especially if they’re using borrowed money (margin trading). If the brokers go bankrupt, investors could lose all of their funds overnight – something that would never happen if those funds were invested into stocks or bonds.
Forex traders suffer huge losses because they are routinely exposed to the currency risks of holding a specific currency.
Because most forex brokers don’t have quality technical support teams on standby, it’s always hard to resolve issues while trading live. There are no formal rules or standards that regulate broker practices, so there’s no telling which broker would honour their agreements and which one won’t.
Some ways stock traders have it better than forex traders:
- You don’t have to borrow money or use margin trading
- Stocks correlate with commodities, which helps diversify your portfolio
- Stocks are traded on formal exchanges
- There’s an open outcry system for public trades
- Stock traders know precisely how their trade will affect price and volume
- You can place trades around the clock
- There’s no need to wait for another trader to agree to the terms of your trade
- There is a zero-sum game which makes it easier to understand what you’re doing
- The market has a fixed spread (you cannot change that)
- There is high liquidity. See it here!
Both markets have benefits and disadvantages, but as a retail investor, you should focus on “easy money” and head towards low-risk investments like stocks rather than make things more complicated by trading currencies. If you want quick returns with little risk, then forex is the way to go!