Investing 101 – A Mini Guide
Before you get started in investing, there are some terms and strategies you need to understand so that you can avoid some common mistakes. First of all, you need to understand that making money from investments comes directly from the amount of risk you take. If you aren’t a risk-taker, then some forms of investing aren’t for you.
There are low-risk investments that the average individual can partake in without feeling the pressure of higher-risk investment. These low-risk investments, such as bonds, certificates of deposit and savings accounts pay off relatively little and require a long time to mature, while high-risk investments, such as FOREX trades, derivatives and alternative financial products, can potentially pay off significantly more in a short amount of time.
In the case of FOREX trading, you can earn thousands of dollars on a single trade. Obviously, however, the reverse side of this argument is that you can lose just as much in a few hours.
Good Low-Risk Investments to Get Your Feet Wet
Less than 10 percent of day traders become successful on the FOREX market, and the rest either fail to earn a profit or lose a considerable amount of money. Another important point to consider is your age and how long you have before you want to collect your earnings.
If you’re under 45, you can afford to take more risks than someone older, so stocks, futures and other derivatives are a good choice for a substantial portion of your investment. Stocks tend to pay off about 10 percent on average, but they lead to losses more often that safer investments, such as bonds, CDs or structured deposits.
Derivatives can be an interesting investment, if you want to take a little more risk for the chance of earning more money. These financial products are investments derived from some other product or commodity, hence the name derivative. For example, futures, the most common type of derivative, are sort of like a bet you make with the owner of a sum of some commodity, such as apples, barrels of oil, plastic bags, etc.
The owner of this product takes out a contract with you to protect the investment he’s put into producing the commodity. You pay him for the product at an agreed-upon price, and you hope that your contract is worth more than you paid for it at its maturity. Unlike most other types of investments, derivatives are a zero-sum game because either you or the owner of the commodity will lose money, or neither of you will make a profit.
Leveraging High-Risk Investments
The FOREX market pays relatively little for a large investment; the changes in most foreign currencies are small from hour to hour. Therefore, you have to invest thousands of dollars to earn tens or hundreds from a single trade, but if you don’t have $100,000 in cash, you can use what’s called leverage to make bigger trades. Banks lend out money for investors to make trades, and they collect interest on these loans when the trade is over. Because foreign currency fluctuations are so small, it’s not likely that you’ll lose much of the loan you used to leverage your FOREX trade, so in most cases, it’s not difficult to repay the bank. Also never overlook the importance of a reliable online trading brokerage company.
Taking out a mortgage is another way of saying that you’re leveraging your real estate investment. Most investors don’t have hundreds of thousands or millions of dollars to invest in property, but they can still earn a profit by taking out a mortgage that costs less than they stand to make on the real estate deal. They’re not actually risking all the money they borrowed for the investment; they’re only risking the costs of the transaction and the fluctuation in value during the time that they own the property.
Smart Investments for the Average Person
Rather than learning enough about investing to become a financial professional, most people hire a money manager to pick their investments and to watch their money. Mutual funds are a popular investment for people with only an average amount of financial knowledge; these funds include a diverse selection of financial products, such as stocks, bonds, derivatives and alternative investments. Structured deposits are a relatively safe alternative investment that are managed by a banker and typically earn as much as stocks or derivatives. However, be forewarned that even if you diversify your portfolio and hire a professional to manage your investments, you still risk losing some of your money.
At the end of the day, investing is a risk that can be rewarding if done correctly. When trying anything new, take your time to understand, learn and consult before venturing on your own. There are many websites, like www.investopedia.com, and other resources that one can turn to. So, when it comes to consult with a professional, you can follow along and make an informed decision. Your wallet will appreciate it.