Investing 101
Why Investing 101?
This website is actually the result of me doing something that I was supposed to have started doing years ago. And that’s investing. I used to be the type that keeps putting off the day when I actually start investing, but now I realize it’s really a necessity. Funny thing, once I decided that it was what I needed to do, I realized something else: it would be a good idea to learn the basics of investing first, and also some investment strategies, to make sure that I wasn’t going to be throwing my money away.
So I decided to build a website to share what I find out on this journey. Instead of keeping the goods to myself, I figured it would be very interesting (and very rewarding) to post on a regular basis and turn this site into an “Investing for dummies” resource. I’ll go into what types of investments there are, and the pros and cons of each of them, in plain English so that people who don’t necessarily know about investing can come here and get a clear explanation and have a pretty good idea of what to expect.
The one thing I’ve already understood in the process is that there’s no such thing as a zero risk investment. Don’t get me wrong, you can invest money with very little risk, but at the same time you have to understand that risk is something you’re never really going to get rid of. So much so that there’s a direct relationship between risk and profitability: the riskier an investment, the more likely you are to make money. Of course, it’s assumed that you understand that you can also lose your money.
With that established, the next step is to assess your risk profile. In fact risk assessment is a major barometer when it comes to deciding how much money you can invest and in what kind of investment vehicle. If you are absolutely risk averse and cannot afford to lose any money then you will have a specific investing strategy. You might not get the highest returns, but you will be protected against losing huge amounts of money. On the other hand, if you fully understand that there’s a possibility that you will lose money, and you are more risk prone, then you may invest in vehicles which can potentially give you returns in multiple digits.
So what types of investments are out there? Here’s a (partial) list
Investing 101: Stocks
When people talk about investing, most of the time they’re thinking about investing in stocks. After all, it’s usually the stocks that get the big headlines and garner all the media attention. Just check with the NYSE to see how many stocks are actively being traded. Stocks are perceived to be much riskier than bonds, but I’ve found out that there isn’t that much of a difference in terms of risk, depending on how long your investment horizon is. In any case, there’s so much information out there it’s very difficult to to narrow down and focus on one area. Then of course there are so many technical terms that get thrown around: (bear market, bull market, P/E ratio, trade volume, just to name a few). What does it all mean and how can you get a handle on this? I hope this site will help clarify that.
Investing 101: Bonds
When you buy a bond, you are actually loaning your money to the organization that issued the bond. That is why bonds are often called debt instruments. Bonds are also called fixed income securities. The reason that they are called this is because the income you get from bonds is fixed. You invest a certain amount in the bonds you purchase and after a certain amount of time, when the bonds mature, you get a certain return. You’re basically lending out your money to the government or a corporation and they are paying you back with interest at a later date. Investing in bonds carries a lower risk, therefore the return you get is pretty low.
Investing 101: Mutual Funds
Mutual funds are a collection of stocks and/or bonds put together in one portfolio. More specifically, a mutual fund is a professionally managed fund that pools money from several investors and invests it in shares, stocks, bonds, short-term money market instruments and other securities. A fund manager, who trades the pooled money on a regular basis, manages the mutual fund. Any profit that is earned from this trading is distributed to the investors. When you buy into a mutual fund you are actually throwing in your lot with a bunch of other investors. The theory behind mutual funds is that the diversification of investments will help prevent against any great loss on the investment as a whole.
Investing 101: Real Estate
Although the industry has been affected by the condition of the economy, it is still a viable and reliable sector which promises rewarding future ventures and pursuits. Hence, more and more individuals are planning to make it big in the real estate industry no matter how difficult and financially challenging their pursuits may be. Some major advantages of investing in real estate are as follows: appreciation, leverage, tax savings, and freedom. You can choose to buy properties and rent them out, or look for bargains and sell them at a profit. No matter your investment style, you’ll find something that suits you in real estate investing.
Investing 101: Options
Stock options are options that are based upon individual stocks (such as Sony or Phillips), known as the underlying stock (or simply the underlying). Stock options give the right (for the buyer) or potential obligation (for the seller), to buy or sell the underlying stock at a specific price, either on (for European style options), or before (for US style options) a specific date (known as the expiration date). When using stock options to invest in a particular stock, the reasons for investing in the stock should be the same as when buying the actual stock. The only difference is that the trade is executed using options contracts instead of the underlying stock. This allows for great potential profits, but you can also lose a lot of money. It’s best left to more experienced investors.
Investing 101: Futures & Commodities
Futures and commodities speculators can take advantage of highly leveraged exposures in both financial and non-financial markets (commodities such as energies, grains, meats and metals). That means they can buy futures contracts by depositing just a small percentage of the overall contract price. Their goal is to profit from changes in the price of the futures contract. Because the futures and commodities markets can be highly unpredictable — often swinging dramatically — investing in futures and commodities is not suitable for all investors. You may lose your entire investment and, in some cases, even more than you invested. In addition, there may be times when you have difficulty selling your futures contracts, which may limit your access to cash. Best suited for experienced investors with deep pockets.
Investing 101: FOREX
FOREX is the abbreviation for the Foreign Exchange market. FOREX is basically an international exchange market where currencies from all over the world are bought and sold for profit. FOREX is a very unique market because it is not based in any particular place, and it also has very few qualifications for investing. FOREX is also free of external controls, and the investors (participants in the market) largely determine how much a currency is worth based on demand. Almost anyone can invest in FOREX (although that doesn’t mean that anyone should), and there are strategies for investors who want to have long-term gains, and strategies for investors who desire short-term gains. You need experience and money to play in that courtyard.
Investing 101: Precious Metals (Gold, Silver…)
Experienced investors have long known that gold, silver and platinum can be a solid investment choice. Precious metals are stable in times of worldwide uncertainty, or when the economy is bad. Used correctly, they can be an effective component of a diversified investment portfolio, but remember, they are an investment like any others, and have an element of risk (albeit more modest). It’s essential to achieve the proper mix.
As you can see, there are a lot of options when it comes to deciding where to put your money once you decide to start investing. Hopefully Investing 101 will help you on your journey to finally make money investing!