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Bonds vs Forex Trading: Which Investment is the Most Risky ?

Online Forex Trading

There is always a certain amount of risk when it comes to investment in the market. There are a lot of ways through which one can put their money in investment schemes, but the most common ways are through bonds and forex trading. Though both the ways have high risks associated with it, this article will carefully analyze bond vs Forex trading and determine which investment is the riskiest.

What are Bonds?

In financial terms, bonds refer to a kind of indebtedness of the issuer to the bondholder. To explain it in easy words, a company or the person issuing a bond is indebted to the person who is holding the bond. There are two types of bonds – municipal bonds and corporate bonds.

A bond can be regarded as security against bankruptcy or debt security. The issuer of the bond pays a particular amount of interest to the holder until the maturity date or pays the whole principal after a period of time. Bonds are highly liquid in the secondary market and this is what makes them risky.

What is Forex Trading?

Forex, also known as the Foreign Exchange market, is a kind of investment where several currencies are traded. The market determines the foreign exchange rate and according to that information, currencies are being traded for a particular amount to gain profit. It is a decentralized or off-exchange market where investors speculate the market value between two currencies and then invest in it at a fair price.

One must remember that Forex Trading is a highly unstable market where currencies prices can even plunge down creating massive loses. This exchange and investment market work through forex broker, financial institutions and operates even on several levels. As per the trading volume, Forex trading is considered as one of the largest markets for investments.

Which Investment is the Riskiest?

Both bonds and Forex trading has their own characteristics that determine the safety and return to the investors. Some investors prefer quick money and don’t mind investing in high risk, yet high returns; while on the other hand, some would prefer security and safety instead of returns. In this matter, it should be noted that bonds offer security to the investment, but low returns and Forex trading gives high returns. It should not be regarded that foreign trading doesn’t have any security at all, but since the market trends are highly unpredictable, it cannot be guaranteed.

Let us analyze the differences between bonds and forex trading investment in detail to have a clear idea about these investments.

Market Response

When a person invests in a particular amount of bonds, there cannot be anything extra a person can do until it reaches its maturity date. The maturity date of the bonds is usually determined by the amount of bond and also the issuer. It can take years to mature while you get a certain amount of interest, or just wait until the debtor pays you the whole principal rate.

In this way, bonds are usually a safe and secure way of investment, but one has to be patient and the returns wouldn’t be huge. Though the returns are considerably profitable since bonds interests are quite high, but compared to other investment techniques, it isn’t much. To add more stability to the investment, some investors prefer buying bonds from diverse corporate or institutions to enlarge their portfolio and add extra security to the investment. It is better to invest small amounts in different places than to experience a loss from a particular place.

Forex trading involves an all-time engagement to the market on workdays, ie, Monday to Friday. This investment scheme requires one to be aware of the global trends, news and predict the market value of currencies accordingly. This might seem to be a rigorous work since a person has to constantly keep a check on the market trends, but investment at the right time would fetch a huge amount of profit.

Since it is a dynamic and an ever-changing market, a wrong step might take you down the ditch of a huge loss. There is less security, analysis needed to be done, proper knowledge about currencies and global news and even predictability skills to know the right time.

Leverage

When an investor invests on bonds, the amount or cash that is being invested would be tied up with the institution until the bond doesn’t mature. This means that there is no way a person can use that cash or amount to invest in some other investment scheme or bonds. This situation must be considered before investing in bonds because the cash could be stuck for years and you won’t be able to do anything. One can only decide about further actions after the principal is being returned.

When it comes to the Foreign exchange market, the investor has an advantage in this situation. Though the person has to use the cash or amount in hand to invest in the market, they can use the power of leverage to increase the potential of the investment. To understand this in easy words, a 50:1 leverage ratio signifies that an investor can invest $1000 to buy $50,000 worth of currency. This advantage of leverage makes the person open to further investment and win high profits.

The power of leverage within the Foreign exchange market has its own disadvantages. Leverages can quickly erode account balance while making an investment. This mean, if the investor doesn’t understand a losing deal, they would end up losing a huge amount of money, which includes the profit as well as the investment cash.

Conclusion

Market response and leverage are two key factors an investor must consider before investing in any of these investment markets. Bonds might provide less returns and take a way lot of time, it has the power to keep any investment safe and secure from unpredictable market changes. On the other hand, Forex trading involves a whole amount of dynamic diversity that requires quick thinking and all-time watch. A wrong investment in the wrong currency at the wrong time would turn the whole deal into a loss.

Thus, within this whole analysis of bond vs Forex trading, forex trading investment is the most risky.

About The Author:

Daffa Zaky

With over seven years’ experience in the heart of the investment industry, Daffa Zaky has become a respected commentator in the financial world. Daffa remains a keen forex, cryptocurrency, stocks and commodities trader. He is a regular featured analyst for a number of online news portals and was responsible for FXDailyReport.com

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