Can you make a lot of money from online forex trading? Yes. Will you? Almost certainly not.
I am sorry to be the bearer of bad news, but most people lose money on leveraged currency trading — and for good reasons.
FTSE 250 spread betting and CFD firm IG Group is the biggest operator in this sector. It says that 76% of its retail customers lose money. The figures are even worse at rivals Plus500 (80.6%) and CMC Markets (80%).
Not all of the customers who lose money are trading forex, but many are. The foreign exchange market is deep and liquid, making it ideal for chart-based trading. But the reality is that spotting chart patterns and entry and exit points is nowhere near as easy as so-called ‘gurus’ would have you believe.
Most of us don’t put in the years of study and practice needed to become an expert at this technique. And when you juice up your trading by using leverage (i.e. borrowed money), losses can quickly wipe out your account balance.
An easier way to make money
Luckily, I believe there is a much easier way to make money from financial trading. My preferred approach is to focus on investing in well-known dividend stocks with a history of profitable growth.
This may sound like a dull and slow way to get rich, but it does have some advantages.
Dividends: get paid to wait
I only buy dividend stocks. This means that as a general rule, each of my holdings provides cash income for me each year. I prefer high yield stocks, so I usually get a cash return of about 4%-7% on each position in my portfolio.
Because I’m still working and saving for retirement, I don’t withdraw this cash from my stocks and shares ISA. Instead, I reinvest it in more dividend stocks. My aim is to build a growing, passive income that will eventually help fund my retirement.
It’s worth remembering that reinvesting dividends is a powerful way to build wealth. A 5% dividend yield reinvested for 10 years would deliver a 63% return, even without any share price gains.
Which stocks should you buy?
The majority of the stocks in my portfolio are big companies from the FTSE 100 and FTSE 250. Among my top income payers are Imperial Brands (8.1% dividend yield), Aviva (7.6% yield) and ITV (6.1% yield).
As you can see these are mostly big, familiar businesses with long histories. Companies like these may go through difficult periods, but they usually continue to pay dividends and very rarely go bust, unlike more speculative firms.
An even easier choice
Picking stocks still requires some effort and skill. If you’re looking for an even easier way to make money from the stock market, I would suggest investing your cash in a FTSE 100 tracker fund.
As the name suggests, these are funds that simply tracks the movements of the 100 biggest publicly-traded companies on the London stock market. Investing in a FTSE 100 tracker also means that you’ll receive dividends from all the stocks in the index.
At the time of writing, the FTSE 100 has an overall dividend yield of 4.4%. My sums suggest that a 4.4% yield reinvested for 10 years would provide a 54% return, even in a flat market.
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Roland Head owns shares of Aviva, IG Group Holdings, Imperial Brands, and ITV. The Motley Fool UK has recommended Imperial Brands and ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.