Question:
Which is the better investment/trading option, stocks, bonds, or foreign currencies?
Raja from Choiceville
Answer:
Raja, as usual the answer you want is complex, as it depends on many factors, such as your capital account, your time horizon, your goals, your skills, and your trading ability, to name some important ones. In any case, I can make some generalizations that might help you figure this out.
First, you should clearly understand the differences between the three markets. Stocks offer a range of risk/reward ratios. You can take a lot of risk for higher returns, you can invest in stable, blue-chip companies that pay a dividend, or you can find anything in between. Bonds generally offer low risk, low return options. Trading foreign currencies (forex) generally offers a high-risk, high-reward ratio on par with stocks traded on margins, which is otherwise known as using leverage, or borrowed money.
Now, if you are a beginner, you should first learn to trade stocks long, not short. This is the easiest, and safest way to go, relatively. You buy a stock, wait for it to go up, and you sell it. If it goes down, you limit your risk with a stop-loss.
Normally, I would have said go with bonds as the safest way to begin, but the type of bond you buy would define your risk, and it can be quite large. Just ask anyone who held certain bonds last fall. No matter, if you do your homework, and your return requirements are on the low side with minimal risk, bonds can be your vehicle.
Forex is a complex market with tremendous opportunity, as it trades 24 hours per day, year round. But if I am you, I would stay away from trading forex, as it can cost you dearly if you don’t know what you are doing. I hear all the time from beginners who trade forex, and some of the stories are not pretty at all.
The bottom line is that you need to address the factors mentioned in the first paragraph before you trade anything. As always, go into trading well prepared with a strong strategy, or else you risk losing more than you probably want.
Trade in the day; invest in your life …
