In this post we compare Stocks as an investment to Forex.
With the vast array of investments available to today's investors.
Investors find it increasingly difficult to decide which to go for. They have
heard of people who became exceedingly wealthy from stocks and also those who
make incredible returns from Forex annually. This is why we often find people
asking for professional advice on what to go for.
I will do a quick overview of what stocks and Forex are all about before
we contrast and make recommendations. You can skip if you are already familiar
with them.
STOCKS OVERVIEW
Stocks are basically a company's ownership divided into tiny bits called
shares which are then listed on a stock exchange for people to trade and
companies to raise capital.
So let's say Mr A and B decides to setup a company Facebook Inc but
needs more capital to run the company than the capital they have at their
disposal, they can issue an Initial Public Offer known as An IPO through an
underwriter. They present their brochure to the public who reads it and decides
if the company is a viable investment and if the share price issued at the
initial offering is a fair reflection of the company's value.
So let's say Facebook Inc (Mr A and B company) requires $1,000,000
dollars they can issue 10, 000 shares at $100 per share. An underwriter will
buy some of this shares and resale to the public. If the public sees this price
as a great value they will continue to buy the shares in return for part
ownership of the company. This strings of purchases will cause the Share price
to rise. On the other hand if they don't see this company as having a
great prospect they will not buy the stock the share price and thus the company
will not be able to raise their capital.
The challenge in stocks
The major challenge facing a would be investor of a
stock market is to be able to consistently determine if a company's share is
over priced or under priced. An over priced stock will and should be sold
and and under priced should be bought. This will be discussed later in
this post.
Forex
overview
One of
the investments that can offer similar returns as those offered by stocks is
Forex (an abbreviation of Foreign Exchange). Without bothering you with
the history of Forex. Forex is the sale of one currency for another.
These Currencies are normally listed and traded in pairs. So let's say we
want to trade Euro against the US dollars. We bring up a EURUSD chart. An
appreciation of Euro and weakening of the dollar will make the currency pair to
rise on the chart. The appreciation of the US dollar and weakening of the Euro
will make the chart to fall. Buying a currency pair is known as going long and
selling a currency pair is known as going short.
The
challenge in Forex
The major
challenge facing an investor in Forex is to be able to tell where if the
currency pair will go up or come down.
CONTRASTING RETURNS OF FOREX AND STOCKS
The average return of successful Forex traders is known to surpass that
of stocks traders. The major reason behind this is because of the volatility of
Forex. When there is no movement in price it is impossible to make money. The
returns however come with its own downsides, you make money as quickly as you
loose money. So if you are looking for a rapid equity growth you will have to
be looking at Forex investments. I have seen investors make up to 1000% and
over in a year. This is usually achieved on small accounts though of less than
a $1000. As for accounts of $10,000 most successful traders I have seen have
made from 20% to 100% annually. This is not the case for stock traders. I heard
the best traders in wall street averages like 25% annually. and a few are known
to beat the market continuously for 10 years.
CONTRASTING RISK OF FOREX AND STOCKS
Accessing the risk on these trades is related to the returns. In general
the higher the risk you take the greater the return this is true for most
investments. Forex comes at a very high risks. In fact there is a statistics
floating around the internet that 90% of new traders loose their money(although
this has recently being debunked). Stocks on the other hand are relatively
lower risk investments. It has been statistically proven that buying and
holding most stocks can give you fair returns on the long run as the general
market value of stocks rises over time.
CONTRASTING BENEFITS OF FOREX AND STOCKS
Unlike Forex stocks do come with additional perks and benefits some
which include but are not limited to the "feel good feeling" of been
a shareholder of a blue chip company.
- Collection of dividends
As a
shareholder of a profitable company you can be receiving annual dividends for
every share you own. Hence your returns is not just based on closing your
position. These dividends can run into thousands of dollars if you bought
several shares. Tip: Endeavor to buy shares that give
dividends whenever possible.
- Possession of rights
Rights are gives existing shareholders the right/option to buy
additional shares additional shares of stock directly
from the company, typically at a discounted price. So lets say you have
100shares of Company ABC that is doing really well in the market. Many traders
will be interested in these stocks. Instead of issuing new shares to the public
the company may choose to give existing share holders the right to buy first
instead of the public. This gives a kind of VIP feel to existing share
holders
- Bonuses etc
This are
additional shares given to existing share holders. For instance a company might
decide to give 4 new shares for every 10 shares you own.
Forex
on the other hand doesn't have such benefits. Your returns/benefits are
solely based on the position you entered. Hence for traders looking to hold an
investment for a very long time. Buying stocks may be a better decision for
you.
CONTRASTING SKILLS REQUIRED OF FOREX AND STOCKS
Trading stocks requires significant level of knowledge, skill and
understanding of the market as compared to Forex. There are so many easy to
follow indicators with up and down arrows in Forex today that basic
understanding of the market is sufficient to begin trading. This is not so for
the stock market. Unless you want to be a stock market gambler or speculator
you have to really do your home work before buying a stock. Stock market are
influenced by the industry, country, management, quarterly financial
statements, performance of competitors etc. Not having sufficient knowledge and
understanding of these things is bound to lead to capital loss. In contrast,
Forex is basically affected by market sentiments, country's inflation,economy,
country's central bank polices and speeches etc. These factors are known as the Fundamentals
of the currency. Even if you cant understand and read this information
there are so many market following strategies that have been proven in time to
help you make money without the fundamentals behind the currencies.
CONTRASTING AVAILABLE TOOLS
With the rising of so many trading platforms, investors are now
privileged to have so many tools at their disposal ranging from trade
management tools, indicators and even expert advisors (programs that can trade
for you). As at the time of writing this post, I can confidently tell you
that the Forex market has the highest number of tools for any investor wanting
to trade the market. This tools ranges from websites that help you size
positions to programs that helps you do all manner of calculations to aid your
decision to buy or sell. While the stock market do have some tools there are
not as many as those of the Forex market. More so, majority of those in the
Forex Market are free.
Summary
Having given an overview of what stocks and Forex entails. The final
choice of which investment to go for do fall in your hand. MY RECOMMENDATION is
for you to make part investments in both. More in dividend yielding stocks and
the rest in Forex or other financial instruments if this are the only two
investment on your mind, I will recommend a 70 :30 split between shares and
Forex respectively. You can see more on how to split investment based on volatility here.
In our upcoming posts. I will be giving you insights on how to spot a
stock with good potentials and make a few recommendation for you. I will also
give you insights on how to trade Forex profitably. Do subscribes and share the
app/blog with your friends. At three thousand daily views I intend to start sharing
links to some of my portfolios for you to follow.
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