1

I'm interested in both of the above, and had been reading about them for the past year and so. Now I'm finally going to invest money in stocks. But it's been brought to my attention that I there are people I know who are into forex, and make large returns on their investments with those trades.

So what do you guys recommend for a college student with not so much money? The people I know who are into foreign exchange are also students.

A friend's rationale, and it makes sense somehow, is that if with forex, then you'll get more returns from your initial investment (assuming you made your trades right), and then that would allow you to have more to invest in stocks as well.

  • 1
    Higher reward = higher risk. This is very true with Forex, which can be incredibly risky. This is for many reasons, but to make a simple comparison - investing in the stock market can involve diversification through the use of funds, whereas Forex is more like picking individual stocks - less diversified, and therefore higher risk. – Grade 'Eh' Bacon Aug 18 '16 at 18:55
7

Stick with stocks, if you are not well versed in forex you will get fleeced or in over your head quickly. The leverage can be too much for the uninitiated. That said, do what you want, you can make money in forex, it's just more common for people to not do so well.

In a related story,

My friend (let's call him Mike Tyson) can knock people out pretty easy. In fact it's so easy he says all you have to do is punch people in the face and they'll give you millions of dollars. Since we are such good friends and he cares so much about my financial well-being, he's gotten me a boxing match with Evander Holyfield, (who I've been reading about for years). I guess all I have to do is throw the right punches and then I'll have millions to invest in the stock market.

Seems pretty easy, right ?

  • Thanks! I think I'll stick with forex sims first in the meanwhile, and get back to this in the summer :D – Val Croft Mar 23 '15 at 0:03
  • 2
    I think a deeper explanation of what leveraging is, why it is risky, and how it is quite common with Forex investing, could add to the value of the answer, given that the OP seems to be asking the question with little background in the subject. – Grade 'Eh' Bacon Aug 18 '16 at 18:56
8

I would advise against both, at least in the way you are discussing it. You seem to be talking about day-trading (speculating) in either stock or currency markets. This seems ill-advised. In each trade, one of three things will happen. You will end up ahead and the person you buy from/sell to will end up behind. You will lose and the counterparty will win. Or you both will lose due to trading fees.

That said, if you must do one, stick with stocks. They have a reason to have positive returns overall, while currency trade is net-zero. Additionally, as you said, if it sounds like you can gain more with less money, that means that there are many more losers than winners. How do you know you will be a winner? A lot of the reason for this idea that you can gain a lot with less is leverage; make sure you understand it well.

On the other hand, it may make sense to learn this lesson now while you have little to lose.

  • 2
    From a compounding over his lifetime standpoint, the small amount he has at age 20, (example $1000), can balloon to almost $400,000 in 50 years (assuming a 13% avg gain per year in a tax-shielded account). I'd argue that any losses he suffers at this age, are catastrophic losses due to the time value of money. investopedia.com/terms/t/timevalueofmoney.asp – Knuckle-Dragger Mar 22 '15 at 19:55
  • In case anyone doesn't get it, my comment was in response to this - "On the other hand, it may make sense to learn this lesson now while you have little to lose." I'm just saying he has a lot more to lose than you might realize. – Knuckle-Dragger Mar 22 '15 at 20:04
  • 2
    Absolutely. Which is why I advocate for not going down either route. I guess my point was just that I'd rather see some 20 year old do this with $1000 and get burnt than a 45 year old gambling with his/her entire nest egg. The 20 year old still has years of earnings ahead. – jmg229 Mar 22 '15 at 21:53
  • I think I'm going to get into stocks first haha. Thanks for your guys answers! I admittedly haven't tried even the stock sims extensively. And I haven't much time at the moment to get into forex. I'm in a finance org see, and almost all of them are stock investors :))) or at least that's one of our things. Am not a finance or business major though. – Val Croft Mar 22 '15 at 23:54
  • I talked to one of the org's members, and he said that the purpose of getting into stocks (assuming you're using your own money as a college student) was to learn about how to do it so that in the future when you have your own money, you'll already have the experience. Or it can be an intro to when you'll use your parents' money. – Val Croft Mar 22 '15 at 23:59
3

This is an old post I feel requires some more love for completeness.

Though several responses have mentioned the inherent risks that currency speculation, leverage, and frequent trading of stocks or currencies bring about, more information, and possibly a combination of answers, is necessary to fully answer this question. My answer should probably not be the answer, just some additional information to help aid your (and others') decision(s).

Firstly, as a retail investor, don't trade forex. Period. Major currency pairs arguably make up the most efficient market in the world, and as a layman, that puts you at a severe disadvantage. You mentioned you were a student—since you have something else to do other than trade currencies, implicitly you cannot spend all of your time researching, monitoring, and investigating the various (infinite) drivers of currency return. Since major financial institutions such as banks, broker-dealers, hedge-funds, brokerages, inter-dealer-brokers, mutual funds, ETF companies, etc..., do have highly intelligent people researching, monitoring, and investigating the various drivers of currency return at all times, you're unlikely to win against the opposing trader. Not impossible to win, just improbable; over time, that probability will rob you clean.

Secondly, investing in individual businesses can be a worthwhile endeavor and, especially as a young student, one that could pay dividends (pun intended!) for a very long time. That being said, what I mentioned above also holds true for many large-capitalization equities—there are thousands, maybe millions, of very intelligent people who do nothing other than research a few individual stocks and are often paid quite handsomely to do so. As with forex, you will often be at a severe informational disadvantage when trading.

So, view any purchase of a stock as a very long-term commitment—at least five years. And if you're going to invest in a stock, you must review the company's financial history—that means poring through 10-K/Q for several years (I typically examine a minimum ten years of financial statements) and reading the notes to the financial statements. Read the yearly MD&A (quarterly is usually too volatile to be useful for long term investors) – management discussion and analysis – but remember, management pays themselves with your money. I assure you: management will always place a cherry on top, even if that cherry does not exist. If you are a shareholder, any expense the company pays is partially an expense of yours—never forget that no matter how small a position, you have partial ownership of the business in which you're invested.

Thirdly, I need to address the stark contrast and often (but not always!) deep conflict between the concepts of investment and speculation. According to Seth Klarman, written on page 21 in his famous Margin of Safety, "both investments and speculations can be bought and sold. Both typically fluctuate in price and can thus appear to generate investment returns. But there is one critical difference: investments throw off cash flow for the benefit of the owners; speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market." This seems simple and it is; but do not underestimate the profound distinction Mr. Klarman makes here. (and ask yourself—will forex pay you cash flows while you have a position on?)

A simple litmus test prior to purchasing a stock might help to differentiate between investment and speculation: at what price are you willing to sell, and why? I typically require the answer to be at least 50% higher than the current salable price (so that I have a margin of safety) and that I will never sell unless there is a material operating change, accounting fraud, or more generally, regime change within the industry in which my company operates. Furthermore, I then research what types of operating changes will alter my opinion and how severe they need to be prior to a liquidation. I then write this in a journal to keep myself honest. This is the personal aspect to investing, the kind of thing you learn only by doing yourself—and it takes a lifetime to master. You can try various methodologies (there are tons of books) but overall just be cautious. Money lost does not return on its own.

I've just scratched the surface of a 200,000 page investing book you need to read if you'd like to do this professionally or as a hobbyist. If this seems like too much or you want to wait until you've more time to research, consider index investing strategies (I won't delve into these here).

And because I'm an investment professional: please do not interpret anything you've read here as personal advice or as a solicitation to buy or sell any securities or types of securities, whatsoever. This has been provided for general informational purposes only. Contact a financial advisor to review your personal circumstances such as time horizon, risk tolerance, liquidity needs, and asset allocation strategies. Again, nothing written herein should be construed as individual advice.

  • 200,000 pages? That looks like a massive typo. – JoeTaxpayer Aug 19 '16 at 2:27
  • 1
    I read that figure as hyperbole, of a theoretical single book on the entire subject. ? – Chris W. Rea Aug 19 '16 at 2:54
  • "Major currency pairs arguably make up the most efficient market in the world" Well put. I think one reason so many people view forex as something approachable, is because many of the drivers are things they can relate to. 'I think Britain will recover after the Brexit' / 'I think x politician's plan will ruin that country's economy' / 'I think that area of the world is going to improve with education'. Because of how many players there are in this market, movements are large and fast, and it is impossible to react faster than the fx market to news. So you need to predict, which is very risky. – Grade 'Eh' Bacon Aug 19 '16 at 12:59
  • @ChrisW.Rea You hit the nail on the head--that is precisely what I meant by the 200,000 pages comment. If anything, a single investing tome would require much more than that for completeness! – Jason R Stevens CFA Aug 19 '16 at 14:35
  • 1
    @Grade'Eh'Bacon You highlight an excellent example. And many practitioners and non-practitioners argued that Brexit itself was an example of markets' inefficiency, however, I see it as quite the opposite: there was a probability, though seemingly remote (and one might consider the validity of the probability estimates prior to the vote, different topic), that Brexit might happen. The less probable event simply took place; therefore, if anything, the event simply reinforces the assumption of market efficiency in major currencies (assuming the distributions prior to the vote were correct). – Jason R Stevens CFA Aug 19 '16 at 14:44
-1

I took a course in forex trading for 3 months. I also studied financial markets in the Uni. I have been saving in order to start investing but I face the same question. I have gathered some advantages and disadventages that I would like to know your opinion.

Forex market is more liquid, its more easy to identify what makes the currency change and to "predict" it. For small investors its an intraday trading. The risk is huge but the return can be also huge.

Stocks are for long term investements. Its difficult to have a bigger return unless you know something that others dont. Its more difficult to predict price change since its easier to anyone influence it. The risk is less.

  • 1
    It is not easy to "predict" currency fluctuations. That is a very dangerous thing to suggest. – Grade 'Eh' Bacon Nov 22 '16 at 14:13

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.