In a Down Market is Trading Better Than Investing?
Posted on: 13 January 2016 by Jake Davidson
The first thing to note before you save trade or invest is that there’s no certainty. Leaving your cash in a saving account or cash ISA’s offering interest below inflation is actually costing you money as your purchasing power decreases year after year, and fees vary.
Investing in property, commodities or stocks and shares might mean above inflation dividends if they do well, but you might find yourself losing money if markets go down. Trading in the form of contracts for difference (CFD’s) is often popular in down markets as downturns can actually translate into profit but this comes with heightened risks compared to other financial activities.
How Can I Make Money in a Down Market?
Investments are by their nature slower with money being made over months or years and when in mixed funds within such as a stocks and shares ISA, or with a 60/40 portfolio, market wins often offset market losses resulting in overall growth but these depend upon you being exposed to enough winners which isn’t always possible during a market downturn. This is where products such as CFDs really come into their own.
Because a CFD isn’t technically an investment but rather a bet on whether a stock, currency pair, commodity or similar will rise or fall in value this approach allows traders to speculate on both good and bad market news. For example as happened this month the US non-farm payroll numbers* reflect a growing economy then safe havens such as Gold, or currencies such as the Swiss franc are likely to see depreciation as investors look for higher returns.
* Non-farm payrolls represent the number of in work US labour excluding; general government employees; private household employees; employees of non-profit organizations & farm employees
Before you trade consider your exposure
Investments are by their nature slower with money being made over months or years and when in mixed funds within such as a stocks and shares ISA market wins often offset market losses but with the right balance they can offer meaningful return with limited risk. Ultimately you may lose most of the money invested but you’ll never lose more than your total investment.
Not so with trading, because FX providers require only require you to deposit a percentage of the total value of your bet your losses can exceed initial deposit. For example if a typical margin from CMC Markets is only 2 then £350 could buy £17,500 worth of, currency, stocks or shares.
The Dual Edge of Margin Trading
Admittedly trading results in considerably larger exposures but it also simplifies the process Rather than having to transfer thousands from your other saving assets into a bank account to then fund your trading account and losing the resultant interest you can trade in the knowledge that your capital while at risk can be earning interest or growth while you trade.
It should, but unfortunately doesn’t go without saying that you should never put money at risk that you can’t afford to lose, betting on your retirement nest egg or the value of your house might make it possible to make vast sums but it can just as easily go against you.
Trading Up and Down
Ultimately the decision to trade rather than invest need not entail more risk so long as you are well aware of the differences between a trade and an investment. Most providers will offer a demo or practice account, these can make all the difference between losing your life savings and making it as a successful hobbyist or even professional day trader.