In this article, let us answer some fundamental questions about the difference between common stocks, preferred shares, and forex trading.
Risk
Among the three investment vehicles, the one with the highest risk is doing forex trading on your own. Up to 90% of retail traders lose money with forex and there are a number of reasons why. The most common explanation for this is because retail traders like you and me, succumb to emotions when they see they are losing money. They’d close positions only to find out it went their way a few minutes later. It is the lack of discipline and a proven strategy that causes them to doubt their actions and ultimately lose money on forex. You can also do leverage trading with forex which greatly amplifies your gains and losses, one wrong move can wipe out your portfolio.
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The dumb money is another theory why most retail investors fail trading forex. You see, every profit you make is someone else’s loss. Dumb money theory argues that forex trading is ultimately the manipulation of price by central banks so they can take advantage and rake retail investor’s money. Whichever theories you subscribe with, the fact is forex trading is extremely risky.
It is this kind of risk that some experts do not even consider forex as an investment vehicle. For some, it is just gambling. While this may be true for some traders, there is a way for you to lessen the risk with forex and that is to do copy trading. eToro is a simple and useful platform to do copy trading with. It displays the historical performance of professional traders so you can judge by yourself who to copy. Read more about how you can earn from eToro here.
Trading common stocks is another speculative investment with almost the same risk as forex trading. Some stocks will carry a smaller risk because you are able to analyze the fundamentals of a company. A big company with good fundamentals will carry less risk compared to junk stocks.
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Preferred shares let you become a part-owner of a publicly listed company similar to common stocks but the main difference is the guaranteed return by dividends given out either annually, quarterly, or monthly. Preferred shares are generally less volatile than common stocks as people buy them as investments and are there for the long term. Its low volatility also made it more difficult to earn by capital appreciation. You can buy preferred shares from your local banks or your online stockbroker.
To add an additional layer of security, you can also invest in ETFs (Exchange Traded Funds) that carry multiple preferred stocks in one basket. This provides instant diversification, consistent dividends, and the possibility for capital appreciation. eToro has an ETF of preferred stocks called iShare Preferred and Income Sec check it out. You can also invest in the US stock market for long term from eToro platform with no commission, no overnight, or rollover fees by selecting zero leverage upon purchase. It works just like any online stockbroker platform.
Make sure to consider these 5 things before investing.
Economic Relationships
When the economy is good, the currency may appreciate, and the price of common stock usually goes up as earnings of these companies are also likely to go up because everyone is spending in a good economy. Preferred shares during this time may either maintain or go down as investors are more willing to invest in riskier assets with better returns such as common stocks.
When the economy tanks, the currency may depreciate, common stocks go down as there are now a lot of uncertainties with their earnings. Preferred shares being a provider of guaranteed return, may go up as investors hunt for stable companies that offer fixed-income preferred shares. If a company would be forced to declare bankruptcy, preferred shareholders are the first ones to receive compensation upon asset liquidation ahead of common stock holders and creditors.
If there are a lot of uncertainties in economies worldwide, investors tend to flock to safe-haven currencies such as CHF and JPY causing it to appreciate. A slow down in the Chinese economy may depreciate AUD as China is Australia’s major trading partner. CAD usually follow oil prices, NZD with gold prices, and AUD with coal and iron ore (learn forex trading in 30 minutes with this free Android app).
Where Should I Invest?
As you can see, the main difference is the risk involved. Forex is risky but can be mitigated when you copy trade. Investing in big blue-chip stocks can be a safer alternative but you still need to learn how to read a company’s fundamentals. Blue-chip stocks can also be overvalued so make sure to study technical analysis for you to know when to enter the market. Investing in preferred shares can be the safest alternative if you are risk-averse but can also be the slowest as you will relly on dividends to grow your funds.
If you need the money in 7 years or more, then you can still tolerate risk and can consider investing in common stocks. If you need the money within 5 to 7 years, and you consider yourself risk-averse, then safely park it in preferred shares. If you have extra money and still don’t have plans for it, invest in forex and mitigate risk by doing copy trading.
Of course, you can always do hybrid investment where you lock in your gains from forex trading and common stocks and putting it all on preferred shares. This way you will never go back to “zero” as you already locked in gains buying preferred shares which gives you consistent dividends. Alternatively, you can also do the reverse. The money you invest in forex and common stocks are only from dividends from preferred shares. In this way you when you lose in forex or stocks you are really not losing anything directly (only time and opportunity). This is a safe process but very slow depending on your initial capital.
