The current economic climate certainly makes for grim viewing in the UK, with inflation having peaked at a 41-year high of 11.1% in October and subsequent base interest rate hikes increasing the cost of borrowing for both households and businesses alike.
What’s more, the UK has now entered a technical recession following two consecutive quarterly economic contractions, raising the risk of future unemployment and making job insecurity a rising threat nationwide.
Of course, such issues are continuing to exacerbate the fallout from the coronavirus pandemic and its associated lockdowns, and many households may now be considering seeking out new ways of boosting their income in the near-term.
This includes so-called “passive income” streams, which include various investment assets from currency trading to real estate. But what exactly is passive income, and can it supplement or even replace your fixed income in the current economic climate?
What do we Mean by Passive Income?
In simple terms, passive income refers to ‘unearned’ income that’s either acquired automatically or in exchange for minimal labour.
Typically, such income streams are relatively simple and easy to maintain, while most individuals will combine them with a full-time job or career that delivers fixed and reliable income.
To provide some context, one of the best examples of passive income is derived from the sale of digital products online or creation of literature. While these income streams require some initial labour to establish, they subsequently deliver incremental returns and royalties without the need for additional work or interaction.
While there’s some technical distinctions between passive income streams and those derived from portfolios or investment assets, these entities should broadly be considered the same. If we take forex trading, for example, we can see that you’re able to speculate on market price movements through vehicles such as spread betting or CFDs, without even assuming ownership of the underlying financial instruments.
At the same time, it’s possible to leverage automated trading features to remove much of the labour and human emotion from your trades, creating a passive income stream that can deliver disproportionate and significant gains over time.
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The Pros and Cons of Forex as a Passive Income Stream
While forex trading can largely be described as a passive income stream, it does have some notable differences when compared with selling digital products and deriving royalties from books and music.
Make no mistake; there are pros and cons to leveraging forex as a passive income stream, and we’ve outlined a few of these below:
- Pro #1 – Accessibility: Forex trading is more accessible now than ever before, thanks to the rise of licensed and reputable online brokerage sites. These sites make it possible to garner real-time market analysis and execute even a high volume of orders in real-time, whether you’re an active scalper or adopt a longer-term strategy such as position or swing trading.
- Pro #2 – Increased Returns: The forex market enables you to open a margin account, which increases your buying power as a trader. Ultimately, using margin lets you trade with leverage, which in turn allows you to open and control positions that are considerably larger than your deposit and cash holdings. This unlocks higher passive returns and boosts your trading income significantly.
- Pro #3 – Optimal Liquidity: While there are different categories of asset in the FX market, major currency pairs (all of which feature the dominant US dollar) are highly liquid. This means that they can be bought and sold easily in real-time, thanks to consistent demand regardless of the wider economic climate. This also allows for optimal and passive returns across the board.
- Con #1 – No Secure Store of Wealth: When you trade equities or gold, it’s possible to retain such assets as secure stores of wealth. Although you can physically hold currencies, this is not a common way of trading, which means that you’ll often invest in the forex market without holding any kind of tangible asset. This increases your risk, particularly in a volatile space that’s renowned for sudden price shifts.
- Con #2 – The Risk of Increased Loss: While margin trading unlocks leverage and potentially increased returns, there’s also the possibility that you’ll lose considerably more than the value of your cash holdings. This is why it’s important that you are cautious when taking on leverage, otherwise you could end up with a sizable debt rather than a viable source of passive income.
- Con #3 – Forex is a Complex Market – The FX market is also incredibly complex and impacted by an array of factors, from macroeconomic and geopolitical entities to the basic laws of supply and demand. It takes considerable time and knowledge to understand this market and create the necessary sense of determinism to comprehend the underlying laws that govern change, and this may be difficult if you’re trying to combine trading with a full-time career.
The Bottom Line – Is Forex Trading a Viable Passive Income Stream in 2022?
As we can see, forex trading is capable of delivering inflated passive returns to successful traders, particularly those who take the time to understand the marketplace and build a foundation of knowledge before trading for real money.
The use of leverage also means that forex trading is relatively accessible, but there’s no doubt that this type of passive income stream comes with a higher level of risk
However, forex trading also comes with the significant risk of loss, with some 70% of all traders in the marketplace losing money regularly over time. These losses can be disproportionate too, so it’s not an option for the faint-hearted or those of you who are risk-averse.
Ultimately, this is only really a viable option if you have time to learn about the market and can combine the endeavour with a full-time job, at least as you begin to scale your efforts. It’s not advisable to use forex as a replacement for your fixed income stream immediately, as you’ll need to develop practical skills and experience over time.
Similarly, we’d recommend that you use a demo account at your brokerage site of choice, as this enables you to hone and test your trading strategies in a simulated marketplace and optimise your chances of future success.