Investing in Forex or Bonds? • What to choose

Investing in bonds or forex is very different. In order to choose an option it is necessary to consider some important keys. Let’s review the most important ones.

Suppose you are considering how to invest in Forex. In that case, the first thing to know is that the foreign exchange market is one of the largest trading volumes and is grouped into pairs that represent different types of international currencies. It is possible to invest through brokers, and it is possible to trade from low amounts of money, although some investment knowledge is required.

What is Forex?

Forex is the name given to the foreign exchange market. It is a market in which different currencies are traded by grouping them into pairs.

Currency pairs are grouped into different categories depending on their character. The main types are:

• The major pairs: where the world’s major currencies are associated with the US dollar.
• Minor pairs: where the major currencies are found, but not the dollar
• Exotic pairs: where pairs are associated between major currencies and emerging market currencies

How to invest in Forex?

When selecting a Forex investment, we choose a pair to trade on. This pair represents two currencies identified by three capital letters each. For example, EUR/USD represents the Euro and the US dollar pair.

To understand the relationship of the pairs, in the EUR/USD, if it is indicated that the currency is at 1.2, this means that for each euro, we can get 1.2 dollars.

The profit in the investment in Forex is obtained from the difference in the purchase and sale of currencies concerning these pairs when the asset evolves in our favor.

Where to invest in Forex?

To trade Forex, selecting a broker that allows this type of trading is necessary. There are a large number of platforms that offer these services.

To choose a broker to trade in the foreign exchange market, some aspects should be taken into account:

1. The number and types of pairs on which to trade.
2. The possibility of accessing information to learn how to trade Forex.
3. Automated trading tools
4. Demo accounts
5. Minimum deposit
6. Regulation and supervisión

What to consider before investing in Forex?

If you consider investing in the foreign exchange market, you should always consider several issues. Some of the most relevant are:

1. It is a market with a lot of volatility, so you need some technical and fundamental analysis knowledge and tools.
2. The choice of broker is very important as it determines to a large extent the type of support you will have on the platform.
3. It is possible to invest from low amounts, so Forex is worthwhile even if you are trading with little money.
4. Compared to other investment models, the costs and commissions are very low.

However, it is also worth bearing in mind that there are risks involved in foreign exchange trading. Some of the most important of these risks are:

1. Volatile market difficult to trade without basic knowledge.
2. Leverage tools that, although they can make investing easier, can be misused to generate serious losses.
3. The need for relatively constant attention to value movements in currencies.

What are they and why invest in bonds?

To know how to invest in bonds, the first thing to bear in mind is that it is a fixed income investment in a debt issue, institutional or private, with agreed maturity and return. Although it is considered a safe way to invest, it is not exempt from certain risks such as inflation.

Before considering investing in bonds, it is worth considering what bonds are and why they may or may not be suitable for you as an investor.

Bonds, also called debt issues, are instruments that institutions or companies issue to raise money and finance themselves.

Bonds are considered to be fixed-income investments in which, in addition, an agreed return is offered. For example, an institutional debt bond might work as follows:

1. The agency announces the issuance of the bond
2. The bond has a specified term to maturity and offers a return for holding the debt to maturity.
3. An auction is held for the purchase of the bonds.
4. The agency must meet the agreed financial settlement after the maturity date.

There is no single type of bond to invest in. In terms of issuers, the most common are institutional or private bonds, represented, for example, by government debt in the former case or by corporate bond issues in the latter.

In terms of categories, in addition to the bonds with an agreed return that we have already reviewed, there are others among which we highlight the following:

1. Exchangeable bonds
2. Convertible
3. Cash bonds
4. Social
5. Greens

In each case, they have different particularities. For example, green bonds are generally geared toward financing sustainability-related projects or cash bonds towards improving a company’s cash flow needs.

Is it safe to invest in government bonds?

Bonds are considered fixed-income investments with lower risk than other types of investments. In the case of government bonds, moreover, the fact that the government issues them is often added as a safety factor.

However, this does not mean that a bond is risk-free. The most common risk when investing in a government bond is inflation. If inflation rises above the coupon stated on the bond, this will technically cause you to lose money. There are, for example, inflation-linked bond issues to try to remedy this situation.

Advantages and drawbacks of investing in bonds

The main advantage of investing in bonds is that it is an investment with a higher level of security than the average, being a fixed income model which, in the case of institutional issues, assumes less risk than any equity investment.

Another outstanding advantage is that they can acquire them directly without intermediaries. Furthermore, they can trade them freely and recover the investment before maturity.

Among the disadvantages, in addition to the inflation risk mentioned above, there are other risks such as credit risk, if the company or institution is unable to repay the capital, exchange rate risk when the bond is made in a different currency, or market risk that may arise from a rise in the value of interest rates.