In the current low-interest-rate environment, many people are ditching savings accounts that are paying 1% interest and looking for other ways to increase their wealth. Forex trading is one strategy that some people are turning to, while others are looking to boost their savings by investing in stocks. Is one strategy more effective than the other? Let’s compare forex versus stocks.
Social media often portrays forex trading as a glamorous hobby. For example, ads on Facebook and Instagram regularly show forex traders living in expensive apartments, driving fast cars, and showing off their luxury watch collections. These ads will lead you to believe that you can achieve this lifestyle by trading forex just a few hours per day.
However, in reality, most forex traders are not living this kind of lifestyle. In fact, according to some sources, up to 95% of people that try their hand at trading forex lose money.
Disclaimers made by some of the UK’s top forex trading platforms certainly suggest that forex trading is challenging. For example, forex.com says that 70% of its clients lose money, while FXTM says that 83% of its clients lose money trading forex.
So, while there are some people that do manage to generate a second income from forex, it’s clear that most people don’t get rich from it. If you’re looking to grow your wealth, it may not be the best option.
Investing in stocks is very different to forex trading because, over the long term, stock markets tend to rise. This means that if you put together a diversified portfolio of stocks and invest for a number of years, there’s a good chance you’ll increase your wealth. Unlike forex, the odds are in your favour.
Just look at the long-term performance of the stock market. According to Investopedia, between 1926 and 2018 the S&P 500 index delivered an annual return of 10%. Meanwhile, according to the most recent Barclays Equity Gilt study, UK equities have delivered an annual return of around 5% above inflation since 1899. These figures may not sound so exciting at first, but if you were to invest £10,000 a year and you generated a 9% return on your money every year, your portfolio would be worth one million pounds in around 26 years.
There are ways to generate much higher returns from the stock market too. For example, small-cap investing, which focuses on smaller companies, is one strategy that can deliver fantastic returns over time. Had you invested £5,000 in Fevertree Drinks when it floated in late 2014, that money would now be worth nearly £90,000. Similarly, an investment of £5,000 in online fashion retailer Boohoo five years ago when it was an under-the-radar smaller company would now be worth nearly £30,000.
Of course, not every stock performs like this, but the message is clear – the stock market can help you boost your wealth. When it comes to forex trading versus stock investing, the choice is a no-brainer, in my view.
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Edward Sheldon owns shares in Boohoo Group. The Motley Fool UK has recommended boohoo group. 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.