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Should You Invest in The Stock Market or Forex?

  • Investing the money has been largely defined by the objective.
  • People can have a money-oriented goal with a set return over an interval.

Investing the money into various assets has been largely defined by the purpose. When it comes to money making in short as well as long-term, investors, traders, and other market participants do consider multiple asset classes to maximise the returns through the investment pool, effectively safeguarding the portfolio and diversifying the risk over to several assets.

Investors often find it difficult to deduce the proportion of the money that should be parked in various assets, the complexities associated with the assets makes it a little confusing.

While choosing between the asset classes, people typically allocate their money by looking at the historical returns as a good cumulative return over the past six months, a year, two years or five years, makes the asset very lucrative, especially in the eyes of first-time investors and the individuals who have recently stepped onto the investment gamut.

Notably, a towering return in the past, exceptional performance in the recent quarter doesn’t, or a meaningful yearly dividend doesn’t necessarily translate into a good performance in future as well. The past returns are only a reflection of an asset’s performance in history with regard to the then position of the fundamental and technical factors.

When it comes to choosing between the stock market constituents, shares, and forex, foreign exchange assets vis-a-vis currencies, a large section of first-time investors often distance themselves from currency markets as they find stock investing relatively easier than the former.

Both the asset classes have their own merits and demerits, that’s the reason why both the options have their dominance over the large array of investors across the world. Let us take a brief look at two factors that can help to pick up the asset class for all the investors who find it difficult to choose one.

Investment objective

The purpose of investment or a predefined target can be extremely helpful in identifying the assets as your goal defines the kind of investment vehicle that will be required to achieve that objective.

Investors can have a money-oriented goal that can revolve around a specific expectancy of returns over a different time period. An individual may only look forward to safeguarding the money, no matter the returns are high or low, with the primary motive of multiplying the money at a minimal pace, but the fund should be kept safe from all possible risks.

While, on the other hand, some people might orchestrate their objective detailing their monthly or quarterly requirements. In order to achieve this, a person is required to invest the money in a calculative manner through which the desired amount can be withdrawn as per the predefined frequency of withdrawals without hampering the overall investment much.

Both stocks and currencies can fulfil all three objectives. However, stocks can be given precedence over forex instruments if an investor is looking forward to higher returns, chunkier periodic withdrawals. In order to keep the money safe by recognising a minimal return, forex products can be chosen.

Time period

This is one of the most explicit factors that helps in selecting the asset class as volatility plays a big role. For investing in foreign exchange, a person is required to study the gross domestic product (GDP), its growth rate, the balance of trade, fiscal deficit, major political environment, governance policies, rate of unemployment, rate of people chasing the retirement benefits, the quantum of international trade, and any potential disruption in the export-import cycle etc.

All these measures are mandatorily required to be studied to understand the position of a country before investing the money in a currency as the intrinsic value of the currency is primarily driven by the position of a country in managing internal crises, as well as global emergencies.

All the central banks, traders, hedge funds, investment banks, institutional investors and other market players considerably look for the country’s resilience in responding to global challenges. For instance, the US dollar index retreated sharply during the pandemic era after the United States witnessed a massive outbreak of Covid-19 cases and the death associated with it.

A massive hit to world’s most quoted currency, the US dollar, is evident from the recent trading activity as the country’s healthcare facilities collapsed, while the Centers for Disease Control and Prevention (CDC) was unable to contain the daily rate of infections, as well as hospitalisation and the subsequent fatal numbers.

According to the historical trading data, the US dollar index that tracks the greenback’s strength against a basket of six currencies plunged to sub-90 levels in December 2020 for the first time since January 2018, when the retaliatory trade battle between the US and China started. The value of the US dollar index is still hovering near 90.

Meanwhile, the pound sterling remained advantageous during the Covid era as the Great Britain pound (GBP) registered multi-year highs in the fourth quarter of 2020 as market participants expressed confidence in the nation’s proactive response to the Covid-19 pandemic. The domestic currency realised a fresh multi-year high when a unit of pound sterling equalled 1.4249 USD in the last week of May 2021.

On the contrary, the stock market has bounced back sharply in the corresponding period after succumbing to heavy losses during the pandemic-induced crash. According to the data available with the London Stock Exchange, the benchmark FTSE 100 has amassed a gain of more than 35 per cent from the yearly closing lows attained during the Covid-steered market crash.

A gain of over 35 per cent in nearly 15 months is somewhat impressive, but it looks quite less when compared to the performance of America’s Dow Industrials. As per the New York Stock Exchange data, the Dow Jones Industrial Average has at least risen more than 80 per cent in a similar time frame.

While investing in stocks, a person is required to consider the underlying factors behind the stock, namely the company’s debt burden, return on assets, profitability ratios, ongoing projects, guidance for the upcoming year, management’s efficiency in handling acute problems, revenue growth, and cash reserves and balances with the banks and financial institutions.

The macroeconomic factors certainly affect the stock market but in a nominal manner as the company with buoyant fundamentals can survive through mini crashes, as well as economic downturns.

Conclusively, there can be a number of factors that can help in deciding to pick the right option between a number of asset classes, but the investment objective and the time period for which you are planning to remain invested becomes essential before allocating the funds.

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