Deposits or Forex and stock trading: the choice depends on the trader’s predilection for risk, the desire to devote time to learning, the strategy, and the nature of the trader. Investors who preferred deposits could earn up to 2% in 2019. Gold could generate about 12.5%, stock market indices 14-19%, cryptocurrencies more than 100%. With such a return, deposits may seem less attractive assets, but this is only at first glance. What are the advantages and disadvantages of investing in deposits, on what depends on the choice between Forex, exchange houses, and banks, read more in our summary.
Forex, Currency Exchange, or Bank?
Those who invested money in cryptocurrencies in 2017 could earn more than 1000%. Since January, the main stock indices of the United States, Europe, and Asia have already generated more than 13% to investors and by the end of the year, there are still months and a half. In currency pair fluctuations it was possible to earn more than 100% annually, while under interest rates in the United States 2-4%, in Europe 0.5-1%, in Asia 3-7%. The choice between bureaux de change (OTC) and banks in terms of return on investment at first glance is obvious: banks barely cover the level of inflation. But not everything is so clear.
Deposits Vs. Trading
First, in general, I remember the fundamental difference between Forex and the stock market. The exchange is an intermediary, a platform on which you can buy both a currency and securities in physical or electronic form. The investor concludes the contract on paper or electronically with a broker who has access to the stock exchange platform, deposits money into the account, and starts trading. Investing money in assets through the stock exchange, the investor becomes its true owner.
Forex is an over-the-counter market involving traders, brokers, liquidity providers, and market makers. Here the trader also enters into a contract with the broker (or agrees with the offer) and through the trading platform invests in various assets: currency pairs, metals, commodities assets, cryptocurrencies. There are two working schemes for the trader and broker:
B-Book. A scheme in which the positions of the trader are covered within the broker (internal clearing).
A-Book. A scheme in which the broker acts only as an intermediary, bringing the trader’s operations to the global OTC market.
The providers of quotes are the same in both Forex and stock trading. But in Forex traders invest money in CFD (price difference contract), earning in the difference of the value of an asset. This is the main difference between Forex and the stock market. Both Forex and the stock exchange allow to win in the fluctuations of the exchange rates of the currencies, securities, and assets of raw materials. So, what will a potential investor choose: Forex and stock exchange trading or deposits?
Compare the performance of some 2017 instruments:
-Stock Indices. S&P 500 index grew by 14.39%, NASDAQ 19.6%, Nikkei 14.3%.
-Gold. In metal, it was possible to earn 12.5% per year. However, in March, May, and July the chart showed deep losses.
-Oil. “Black gold” rose by just 11%, but analysts are inclined that the controllers for solid growth are not yet given.
-Cryptocurrencies. In individual cryptocurrencies in 2017 investors could earn between 300-1000 and more percentage. The truth and volatility of cryptocurrency compared to other assets is enormous, in a day investors could lose up to 30% of their deposit. In addition, there are frequent cases of cyberattacks on electronic purses and problems of cryptocurrency exchange houses.
Deposits in national currency. According to deposits.org, the maximum rates of different countries in the world were: Russia 7.5%, India 7.45%, USA 4%, China 3.75%, Canada 2.75%, Italy 2%, Japan, and Germany 0.1%.
Compared to the stock market, deposits may appear more promising due to the relatively lower risk. But don’t forget that in deposits the investor earns a fixed sum, and in stock exchange or Forex, the investor can also make profits in short positions (in lowering the price of an asset).
Advantages of investing in deposits compared to the stock and OTC markets:
Reliability: Banks are closely controlled by a central bank because the probability of losing money is almost completely absent. In the extreme case, there are compensatory funds that will return all or part of the deposit. In Forex there are cases when it is necessary to resort to chargeback, and the so-called regulators do not take any action and report the bankruptcy of the broker after the fact.
No risk: In trading, the risk lies entirely with the investor. Although stock indices show relatively stable growth, for example in 2008 they showed weaknesses in stock markets. The example of January 2015 is also indicated when the Bank of Switzerland canceled the ceiling of the currency and the franc rose compared to the dollar by more than 30%. In one night, many traders’ deposits were set to zero.
Availability: The requirements of banks for a minimum deposit are very loyal, investments are available to all. To trade on US exchanges, you need several thousand US dollars, minimum deposits of European Forex brokers, from 100 USD, but even with such amount trading on Forex professionally is difficult due to the volatility of assets.
Facility: To make the deposit is sufficient 30 minutes, after which the investor only has to wait the end of its term. For successful trading on the stock exchange or Forex, you need to constantly follow the news, be able to apply technical analysis, etc., that is, devote a lot of time to learning and trading.
Diversification: Some banks offer gold deposits. The investor gains not only in interest but also in the price growth of the metal itself.
The disadvantages of bank deposits are twofold:
Low interest rates and the trend towards their subsequent decline. In the United States and Europe, the view is that money should work and not be a burden on bank accounts. The low-rate policy encourages investors to invest money in the stock market or business. In some countries, bank deposit rates do not even cover inflation.
The probability of entering the field of vision of the tax services. For the investor it is almost impossible to know about the existence of broker accounts, the bank accounts can be monitored. This situation could become a major obstacle for those who do not want to make the availability of money public.
Bank deposits are a type of investment for those who do not have time to understand the peculiarities of stock trading or currency pairs. For conservative investors, deposits are preferable, even if their return is 3-4 times lower than the return on stock or gold indices, but risks are almost excluded. For the most active traders and who are also available to dedicate time to learning and trading, earning on asset price fluctuations in both directions, it is better Forex or stock exchange. And, of course, we must not forget the diversification of risks: it is a good thing that at least 10% of the investment portfolio is a deposit.