"Stocks
One can invest in shares of a company. To invest in a public company, one only requires the help of a broker. Only certified brokers are allowed to perform transactions on the floors of the major stock markets. There are many different kinds of companies trading in many different sectors. Generally, investors can use the stock market to find the type of risk to reward situation they seek. However some caution should be placed on the fact that stocks tend to follow the general mood of the stock market as a whole. For instance, the last year has not been exactly profitable for most investors. The whole market was bearish, so even the good stocks went down. However, sometimes the whole stock market (or a whole sector) is bullish during these times investing can be very easy and profitable.
Options
The holder of an option has the right to buy or sell a particular asset at an agreed price at a particular time. Options provide investors with leverage on the underlying asset. One can purchase either call options (for upwards price expectation) or put options (for downward price expectation). For example, one would buy a call option on Microsoft if one thinks it has a good probability of going up soon.
Options usually have expiry dates set three, six, or nine months in the future. Options can be used not only to gain leverage on potential price moves, but also to hedge holdings. Hedging is a business technique used to eliminate risk within future price fluctuations i.e. if you have an option that gives you the right to purchase 5000 tons of rice at US $750 in 9 months from now, then your business would not have to worry whether or not the price of rice will have changed by that time. Hedging your positions can be a good strategy to minimize risk in volatile markets. Of course options in volatile markets are in most cases more expensive than normal.
LEAPS (Long-Term Equity Anticipation Securities)
LEAPS are a relatively new investment vehicle. They are in principal the same as options, except for their longer expiration dates. LEAPS have expiration dates one to three years in the future. Since equity price movements can be of a much larger scale during a time-span of one to three years, then so also are the premiums more expensive. Major gains can be achieved with the usage of LEAPS, however the risk associated means they must be used cautiously.
Warrants
Warrants are traded on all the major exchanges. Warrants give you the right to buy a stock at a certain price until the expiry of the warrant. Warrants provide leverage to the investor. Often warrants are included in private placements to give more incentive to investors. Thus, as an investor you should look for those financings that integrate a nice warrants package.
Corporate Bonds
Companies take on debt so that they can expand more rapidly. As an investor you can buy that debt in the form of corporate bonds. The bonds will pay you quite high interest. The security of the bond is tied together with the health of the company. The more stable you think the company is, the better the bonds are. Corporate bonds are not usually as safe as government bonds, but their higher interest compensates this. For those people who wish to take on a small level of risk while earning money in the form of interest, corporate bonds are a good choice.
Government Bonds
The same things as above, except you're buying the debt of a country. This is usually safer than corporate bonds, but consequently they pay less interest. The Government of Canada offers Canada savings Bonds. They are on sale between October and April. They pay a low amount of interest, and mature at the end of ten years. In the United States one can buy Treasury bills (t-bills), Treasury notes, and Treasury bonds. T-bills are short-term investments that are bought at a discount to their real value. Upon maturity the full value is received. You can buy T-bills that mature in 28 days or 91 days. If you have free cash that you want to secure for a couple months, then T-bills are an ideal choice. Treasury notes are for longer-term investments ranging from two to ten years. They give a coupon payment every six months. Treasury Bonds are for the extreme long term, from twenty to thirty years, giving coupon payments just as treasury notes.
Money Markets Funds
These are popular financial instruments that provide a convenient place to store money for short time frames. Money market funds invest the money given to them into high quality debt. They are very liquid and usually give out higher interest than the fed funds rate. Money market funds can be used as a location to put any loose cash, almost like a bank account.
Bank Interest
Just putting your cash in the bank is very liquid. As long as the bank is in good business health, you can take your money out at anytime. On the other hand the interest is usually low in comparison to t-bills and money market funds.
Forward Contracts
An agreement is made for the exchange of an asset. Cash is paid now, and the asset is exchanged at a set time in the future. Forward contracts can be useful to mitigate risk associated with the future.
Futures
An agreement is made for the exchange of an asset at some point in the future. A premium is required to acquire the futures. When the settlement date comes, the commodity is delivered and the preset amount of cash is paid. These can be used to decrease risk; and they are leveraged instruments used to make money on commodities.
Note that Options, Forward contracts, and Futures are all derivatives.
Commodities
Commodities are sometimes considered good investments. They can appreciate in capital value. You can buy them physically, or use the futures markets to get leverage. All commodities are of a standardized quality. For smart investment in commodities, good supply and demand fundamentals as well as price cycles must be studied. It's nearly always a good idea to keep a stern eye on the commodities market. Commodities are the fuel on which most modern business is based on, and thus movements within the commodities markets can drastically affect the world markets. Although it may change, the most important commodity right now is oil. When the oil price rises, all fundamentals in oil based industries change considerably. But the change is not only kept to the oil based industries, oil price increases negatively affect most car companies. An oil price that is too high means consumers won't have any money to spend. This causes all sorts of industries to cave in. Since almost everything at one point or another is created or transported with oil, its price increase makes everything more expensive. Increases in the oil price sometimes even coincide with increases in the Canadian Dollar, due to Canada's large oil industry.
Foreign Exchange
This is investment in a country versus another. If one were to take a long position in the EURUSD pair, than one would be expecting either the EUR to become stronger or the USD to become weaker, or both. Extreme amounts of leverage are available in the Foreign Exchange Markets. The Foreign Exchange market is also extremely liquid. Daily trading volumes amount to over three trillion units. Types of instruments include futures, options, spots, forwards, and swaps. The foreign exchange market can be used to hedge international currency risk. Carry trades may also be implemented. In a carry trade the investor is targeting the interest rate differential between two countries. If this difference is large, then a decent amount of interest can be made.
Real Estate
This is probably one of the most common investment mistakes. Often people think that buying a home is an investment. It's an investment, but one must decide whether it's profitable or not. Commonly people buy a home with living style in mind, which is a very questionable approach. In most cases a house is not an investment. Rather it's a liability. It's what one uses to live in. By taking a mortgage, people end up paying substantially more than the value of the house. Of course, for certain people, real estate investment is a real possibility. Cycles within the real estate market can be decimating if not vigilantly watched and followed.
Mutual Funds
These are a certain type of businesses in which you can invest. In turn their business is investing. Their sales pitch is that they are professional investors, and can probably do better than you. This is not always true. When investing in mutual funds you must do research on the people who work there, and then make a judgment on their capability. For those investors who have scarce extra time, mutual funds are solution. However giving your money to someone who might not understand your risk tolerance isn't usually a good idea. Mutual funds trade large pools of cash, so they can't take into account your own personal risk models.
Other Investment Areas
Above I have written about normal, traditional investments, but there are also other investment areas that can be profitable if the right approach is taken. These investments are usually much less liquid. Some investments would be art, antiques, wines, etc. If you know a lot about a specific market there's a chance that you might be able to make money in that market.
All of the investment possibilities introduced above can be used together to form a profitable, secure portfolio. The capital allocation technique within a portfolio can spread risk among many different sectors. An example of a decently diversified investment portfolio is 30% money market funds, 35% t-bills, 5% major stocks in the mining sector, 5% major stocks in the alternative energy sector, 10% in physical commodities, 5% in options, 5% in warrants, 5% in futures. Since major mining stocks are very dependent on low oil prices, it can sometimes be a good decision to buy long positions in oil. This way if oil prices go up, you mining stocks will be negatively impacted, but your oil positions will be in the money. You also leave yourself open to rises in the price of gold.
The amount of time on the hands of the investor should dictate the kinds of investments to which he ultimately devotes his hard earned money. A common mistake that many people make is they think they can invest in volatile micro-cap companies meanwhile working at a full time job. Unless the job is closely related, one shouldn't attempt it. Investing in micro-cap companies requires possibly the highest level of research and dedication, which means a lot of time is used. Even if small stocks propose the possibility of rapid gains, they also carry the highest level of risk. Very often they have insufficient available concrete information. This means that it's hard for you to do your research. You can't just look at their annual report, and say the profit to earnings ratio looks good, and then buy. Not like you can do that with major stocks, but there is usually a lot more accessible information concerning large-cap companies. Investors in larger companies can relax without the constant stress of risk. However, small companies do give the potential for large gains, and if you're successful you can grow your portfolio much faster than with large companies.
The style of investment that the investor should be using will largely depend on the time considerations and the money considerations. If the investor doesn't have large amount of time available to him, then he should choose something like mutual funds, which require almost no time at all. The amount of money available to the investor will also dictate the style of investment. For example, a person with under US $5,000 would have a very hard time investing in the real estate markets.
The power of compounding can allow our investments to reach unimaginable levels. In investing, the effects of compounding can be seen very clearly. Another thing in which compounding can be observed is in inflation. Inflation is always biting away at our savings. Without investment we are unable to defend ourselves against inflation.
Investment is for the purpose of value retention as well as capital gains. Before putting your money into an investment, always ask yourself honestly if you think that the risk to reward ratio suits your situation. You should always be asking yourself, ""How much can I afford to lose?"" After you have posed yourself this question you can proceed to carefully research all the factors that can have an effect on the price.
Investment is a good part of any financial plan. The benefits can be great if done properly. With a dedicated mind and adequate money as well as time, the average person can greatly increase his financial situation through engaging in attractive risk to reward investment scenarios.
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Below follows some good sources of information where one can study more on the subject of investment."
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