If you’re new to the global investment market and want to identify the best vehicle for making passive income, you’re certainly spoiled for choice in the digital age.
From traditional stock and commodity investments to more speculative assets like forex and crypto, there are options to suit every conceivable risk profile and level of starting capital.
We’ll explore some of these options below, while asking which option is likely to be best for you.
- The Pros and Cons of Stocks
We’ll start with stocks, which typically afford you part ownership of a company and access to a secure store of wealth that can be held over time.
Stocks can also be accessed individually or through a mutual or exchange traded fund, while it’s possible to trade various indexes that represent specific industries or national economies. These options afford you far greater flexibility and natural diversification, ensuring that you’re not overly exposed to a single stock or risk factor.
The yield on stocks can be relatively low (albeit reliable and incrementally higher over time), however, especially if you target blue-chip, large cap firms through dividend investment.
While you can target small cap or value stocks that have the potential to grow significantly in the future, this incurs greater risk that you’ll ultimately record a loss.
- The Pros and Cons of Forex
Next up is forex trading, which is a speculative asset class that involves international currencies. These derivative entities are traded as pairs, so you can make money simply by speculating that one currency will rise or fall in value against another.
This means that you aren’t required to assume ownership of the underlying financial instrument, and enables you to profit even in a depreciating marketplace.
However, the sector is highly volatile, while the ability to take on highly leveraged positions (which are significantly larger than your initial deposit) can incur similarly disproportionate losses.
Even with reputable brokers, it’s possible to secure leverage of up to 100:1, so it’s important to enter the market with an open mind and minimise leverage as a way of balancing the risk-reward ratio.
Cryptocurrencies represent a relatively new asset class, and one that revolves around immutable and decentralised assets such as Bitcoin. A truly speculative asset class, crypto tokens are free from any central points of control and the risk of manipulation, while they’re also heavily influenced by overt sentiment in the marketplace.
Similarly, cryptocurrencies aren’t vulnerable to the macroeconomic climate, which is why such assets experienced sustained growth as a part of a crypto bull run through 2020.
This, coupled with the finite supply of assets such as BTC, have also seen Bitcoin compared with gold in terms of its ability to offer a secure store of wealth during economic hardship.
However, such assets remain inherently volatile, with BTC having recently lost 53% of its value during a sustained market crash.So, while they tend to appreciate significantly over time, they also experience huge periods of interim uncertainty.