In most countries, having $100 000 in cash is what the average person would consider substantial, something akin to winning a fraction of a large lottery jackpot. Depending on your living costs and where you reside, it can be enough for some to semi-retire or at least not work for several years.
The advantage of having such a high sum of cash is the broad range of investing options at your disposal. If you feel conservative, you may get a small but safe return putting this money in an interest-bearing account from your bank.
On the flip side, it may be worth considering other options that potentially produce more income over time, despite being less orthodox. This article will provide a few options in this regard, namely trading forex, investing in a forex robot, or starting your own prop firm.
As expected, each of these avenues presents unique advantages and disadvantages and poses different entry barriers, all of which will be covered more broadly.
Most literature is quick to suggest forex trading for anyone looking to invest $100 000 in a financial market. Often, stocks and other exchange-traded products are always seen as the ‘safest bet’ of all instruments out there.
While these are quite ubiquitous, they are not as flexible for a few reasons. For starters, you would need to deploy a lot more of your capital considering the lower leverage; this is where forex trading comes into play.
Of all the markets, forex has the lowest barrier to entry. It can allow an investor to use less of their capital but still realize a bigger gain risking the same monetary amounts. But why is this so?
Forex is the most liquid financial market globally, meaning the sheer number of buying and selling occurring every day is significantly larger than stocks and several other securities combined. This effect creates much more volatile prices.
Although some may frown upon volatility, it’s necessary if you’re looking for bigger gains within a shorter period. Of course, we cannot ignore the trade-offs here.
Forex tends to be geared towards short-term trading that is inherently risky partly because of the tremendously high leverage. Fortunately, one can utilize several long-term strategies in currencies, like the carry trade, where you can earn interest for holding your positions.
If we weigh up all the pros and cons of all popular tradeable markets, forex is by far the one market with the lowest barrier to entry, which is particularly beneficial for your capital. It could be an option to consider if you’re looking for high-risk/high-reward returns or smaller, long-term gains through carry trading.
The world of automated trading with forex robots has become quite popular in recent history as more investors have shied away from the somewhat daunting nature of self-directed trading. So, what is an FX robot?
A robot is merely a program on trading software that automatically executes positions based on pre-programmed parameters. The purpose of such an invention is that no manual interaction is required since the robot executes trades by itself without needing a human to do the heavy lifting.
A robot eliminates any emotional bias and can execute far quicker than an ordinary trader by having this quality. Unlike regular self-directed trading that we discussed previously, it is a time-saving strategy to profit from the markets as you don’t need to follow them actively.
Like normal trading, the barrier to entry is also low because of the nature of the currencies market. However, the robot industry is quite murky for a few reasons. One of the main gripes experts have with bots is the lack of transparency offered by developers.
Although you always need to verify the long-term performance of any automated trading strategy, this is no true indication of how it will perform in the future. Also, robots are known sometimes to employ terrible money management practices, increasing your risk of losing a large portion of your account.
On the bright side, you would not need to invest $100 000 in a few robots, meaning you can save money on other things. The most challenging part is finding the best and most consistent robot providing transparent performance statistics.
Starting your own prop firm
A prop firm is a financial institution allocating a large portion of its funds to other traders to generate profits for the company. Let’s explore how a typical privately-owned prop firm functions nowadays.
As an investor with this business, you would first screen potential traders to see if they met certain performance metrics. Here, this group would pay a non-refundable joining fee, which is the main way to cover much of your running costs.
Even if the traders failed the test, you could receive a lot from the fees alone. Moreover, you would take a cut from all the profits made by those successful enough to pass the verification stage. Plus, a prop firm is advantageous since you can limit how much capital is risked in the markets to every trader joining the firm.
Yet, a prop firm has a much higher barrier to entry because it’s far more capital-intensive than the other two options. If an investor didn’t want to deploy all their $100 000 investment, they would need to start very small and build from there, which is a safer choice from a risk perspective.
If they wanted to expand a bit more from the onset, they would probably have to get financing or bring a few other investors on board. A prop firm may be viable for someone who prefers a traditional, hands-on business they can run themselves and wants to leverage from the trading performance of other skillful traders.
One of the many benefits of having $100 000 to invest is how much you can diversify your money. While each option we’ve reviewed in the article is individual, there is no harm in spreading yourself.
For instance, you can easily venture into FX trading and simultaneously invest in a robot. Or you could start a small prop firm while generating returns from the former. Investors can never be limited to just one stream, but nothing is wrong with this approach if you prefer to specialize.