When it comes to investment opportunities today, some investors choose bonds for safety and security, while others seek high profitability on the Forex market.
When comparing the bond market to the currency exchange marketplace, you’d think that there would be few similarities between the two entities. This line of thinking is fairly conventional wisdom, as many feel that those who invest in bonds generally do not play the Forex market at the same time. After all, bonds are usually considered to be fairly low risk, low reward investment opportunities, while Forex is a much more dynamic and high-potential forum for investing. By pairing the two, however, a savvy investor can create an investment portfolio that combines long-term, low risk investments with high-yield, short-term options like currency exchanges.
First of all, what is a bond? Put simply, a bond acts similarly to an I.O.U., and is a debt security that is generally issued by a corporation, federal agency, government, or municipality, who then acts as the issuer. Upon receiving your money, the issuer will then provide you with a bond that contains a promise to repay the face value of the bond, in addition to a predetermined rate of interest throughout the life of the bond. These are sometimes called debt securities, notes, debt obligations, or simply bills.
Forex, on the other hand, is a currency exchange marketplace in which investors speculate on future currency valuations between two unique sets of currency. For instance, the US Dollar to the Japanese Yen, or the Euro to the Canadian Dollar, are examples of currency pairs that can be traded through Forex. This platform is unique in that it allows for frequent trading with minimal costs.
Now that we have defined both a basic bond and the currency exchange marketplace, let’s take it a step further and discuss some of the differences between the two investment opportunities in order to help you make a more informed decision as to how to make your money work for you.
Market availability: You purchase a bond and basically stick it in a drawer until the maturity date arrives. There are few investment vehicles that enable the investor to take a backseat and essentially forget about the purchase for years to come, yet bonds enable you to do just that. It is for this reason that many investors choose to purchase a specific quantity of bonds in order to diversify their portfolios and add a sense of stability to their investment accounts. With Forex, you’ll have access to a 24 hour a day marketplace that operates from Monday to Friday, and enables you to make quick and reactive trades in response to market conditions or global news events. For this reason, Forex demands a much more involved investor – one who sees the positives in having access to an open market at 3 o’clock in the morning. While it isn’t required to watch your currency accounts through the night, you may be able to make profitable trades when you react according to events overseas.
Leverage: When you buy a bond you must use on hand cash or capital to conduct the purchase. This means that your money can be tied up for months or even years to come. With a Forex trade, you still need to use your own money or margin account, but you’ll be able to use the power of leverage to amplify the potential of your trade. For example, a 50 to 1 leverage ratio means that a $1000 investment can purchase $50,000 worth of currency. Obviously, this can enable a new investor or one who has limited access to capital to drive significant profits without much upfront investment. However, it must also be approached with caution, as a leverage trade has the ability to quickly erode the balance in the related investment account if a losing position is realised.
Profitability: Few investors can rightfully claim that they have made a fortune in the bond market. In fact, it is the slow tempo and highly regulated process that makes bonds such a safe, if low yield, investment opportunity. There is so much money to be made in the currency exchange market that one only has to look at a standard day’s trading volume to understand the upside potential and market fascination with Forex. A standard day in the Forex market contains more than $5 trillion worth of currency swaps, while the New York Stock Exchange sees about $35 billion in total daily dollar volume. Alternatively, ask legendary investor George Soros, who made more than $1 billion in one day through a currency exchange transaction. The potential for real profit is there with Forex, while bonds simply help smart investors to outpace the costs of inflation.
When you compare the bond market with the currency exchange marketplace, it quickly becomes apparent that these are two wildly different investment opportunities. One represents a “slow and steady” approach to investing that certainly has its time and place. In fact, you would do well to diversify your investment portfolio with several types of bonds. Forex, on the other hand, feels completely different in a real-world context. Those involved in Forex understand and appreciate the lightning quick access to the Forex marketplace. This enables real-time trades and incredible liquidity – or an easy ability to exit a position at any point of the day. Forex traders also understand that currency swaps involve serious insights into both domestic and global financial markets, news events, and other key indicators that can help to drive currency transactions. In the end, a diverse balance of both types of investments makes sense for the majority of investors.