Deposits or Forex and exchange trading – the choice depends on a trader’s risk-taking, wish to spend time on training, on a trader’s strategy and personal features
Investors, preferred deposits, could earn up to 7% in 2017. Gold could yield about 12.5%, stock indexes – 14-19%, cryptocurrencies- more than 100%. With such return, a deposit could seem a less attractive asset, but it only looks so. What are the advantages and drawbacks of investing in deposits, what does the choice between Forex, stock exchanges and banks depend on? Read on in the article.
Forex, exchange or a bank?
Those, who invested in cryptocurrency in 2017, could earn more than 100%. Since January, the leading stock indexes of the USA, Europe and Asia have yielded investors more than 13% already, and it’s still a month and a half till the end of the year. Currency price changes can yield more than 100% a year, while the interest rate in the USA is 2-4%, in Europe – 0.5-1%, in Asia – 3-7%. at firs sight, the choice between exchange (and off-exchange) trading and banks, according to the investment return, is obvious: banks hardly cover inflation. But everything is not that simple.
Deposit VS trading
First, I’ll remind the principle difference between Forex and exchange market. An exchange is an intermediate, a platform where one can buy both currencies and securities, in their physical or electronic form. An investor makes a contract in paper or electronic form with a broker, who has an access to an exchange (trading) platform, tops up his/her account and starts trading. Investing money in assets through an exchange, an investor becomes their real owner.
Forex is an off-exchange market, participated by traders, brokers, liquidity suppliers, market makers. There, a trader also makes a contract with a broker (or agrees with offer) and invests through the trading platform in different assets: currency pairs, metals, commodity assets, cryptocurrencies. There are two models of trading between a trader and a broker:
- B-Book. A model, when a brokers bet against their traders and keep the trades internally (internal clearing);
- A-Book. A model, when brokers are intermediates and send the trader’s orders to the off-exchange market or liquidity providers.
Quotes providers are the same both in Forex and in exchange trading. But in Forex, traders invest in CFD (contracts for difference), making profits from the difference in asset prices. That is the main difference between Forex and exchange. Both Forex and exchange let make profits from price changes of currencies, securities and commodity assets.
But what a potential investor should choose: Forex and exchange trading or deposits?
Let’s compare yields on some instruments for 2017:
- stock indexes. S&P 500 grew by 14.39%, NASDAQ – by 19.6%, Nikkei – by 14.3%;
- gold. The metal could return 12.5% a year. But there were deep drawdowns in March, May and July.
- oil. Oil gained in total slight more than 11%, but analysts don’t think, there are any drivers for a significant growth.
- cryptocurrencies. Some cryptocurrencies returned from 100% to 1000% and more. However, their volatility is enormous, when compared to other assets. Investors could lose up to 30% of their deposit just for one day.
- deposits in national currency. According to deposits.org, the highest interest rates in different countries were: India – 7.45%, Russia-7%, the USA – 4%, China – 3.75%, Canada- 2.75%, Italy- 2%, Japan and Germany – 0.1%.
When compared to stock markets, deposits can look more promising due to a lower risk. But remember, that investors make fixed profits from deposits, in an exchange or in Forex, investors can take profits also from short positions (when the asset price decreases).
Advantages of investing in deposits in comparison to exchange and off-exchange market assets:
- safety. Banks are strictly controlled by the central bank, so there is hardly a possibility to lose your money.
- no risk. In trading, investors take all the risk. Although the stock indexes grow relatively steadily, the example of 2008 showed the drawbacks of the stock market. Also, there is the example of 2015, when the Swiss National Bank abandoned its currency ceiling and frank increased by more than 30% against dollar. Just for one night many traders lost their deposits.
- accessibility. Banks’ requirements to a minimum deposit are not strict, everyone can invest. One needs a few thousands of dollars to trade in U.S. exchanges, minimal deposits for European Forex brokers start from $100, but it’s difficult to trade in Forex with such an amount due to assets volatility.
- diversification. Some banks offer gold deposits. Investors make profits not only from interest rates but also from the metal price growth.
Bank deposits have only two drawbacks:
- low interest rates and the tendency to further decrease. It is believed in the USA and Europe, that money should work and not just be kept on bank accounts. Low interest rates policy encourages investors to invest their funds in stock market or business. In some countries, interest rates of bank deposits don’t even cover inflation.
- probability to be noticed by tax authorities. It is hardly possible to learn about broker accounts, opened by investors, but bank accounts can be monitored. It can be an obstacle for those, who are unwilling to display their money.
Conclusion. Bank deposits suit those, who don’t have enough time to study the nuances of trading assets or currency pairs. They are also good for conservative investors, because there are hardly any risks, although deposits’ yield is three-four times lower, than that of stock indexes or gold. For active traders, who are willing to spend time on training and trading, making profits from asset price changes in both directions, Forex or exchange trading will suit better. And of course, risk diversification shouldn’t be forgotten: it’s good if a deposit will make up at least 10% of investors portfolio.
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