How to learn essential aspects of investing in a most efficient way? Entering a world of investments is not easy and required solid knowledge, ability to make analysis and predict the market. Money and financial markets do not forgive mistakes, so whether you act smart and knowledgeable or you get your “instant wallet karma” that means you will inevitably face losses.
The first and foremost you should learn about investment is a money management and a principle of creating an investment portfolio. Depending on what type of investment strategy you will choose, you will either choose the low-risk, safe, and low-yield assets to buy, or you’ll risk it all by picking high-risk and high-yield instruments that may potentially double your money within months.
Types of investments for private individuals
Investment in stocks and bonds
Stocks and bonds are the most common securities traded on exchanges. Stocks (or shares) are issued by Companies who seek for investments and ready to share the ownership of the Company for the certain price. The owners of physical shares receive regular dividends from a Company’s profit. If shares are traded with the speculative purposes, the investor earns on stocks’ price fluctuations.
Bonds are issued by Companies with the purpose to attract additional funds. Holders of bonds receive payments (the interest rate), while the Company has financial obligations towards its bonds holders. At the date of bonds expiration, the Company is obliged to redeem the securities. Basically, bonds are the form of a loan, which Company is being granted by the bonds holders. Bonds are traded with speculative purposes as well.
Investment in precious metals
The most widely traded precious metals are platinum, gold, silver, and copper. There are several ways a private investor can invest in precious metals: by buying physical pieces, electronic certificates, future contracts and other. The price of precious metals depends on macro data and global financial sentiment significantly. For instance, there is a direct correlation between oil price and gold price.
In times of global financial crisis precious metals (especially gold) get all the attention of investors who consider gold as a safe haven.
Investing in commodities and derivatives
Commodities are the products that are traded all over the world and have a constant global demand. The most popular commodities are crude oil, wheat, corn, soy beans, and coffee beans. Commodities are traded on the separate exchanges (for example COMEX). If you want to invest in commodities you’ll be offered to do it through derivatives – contracts for certain types of commodities that are often traded for speculative purposes (like future contracts and options).
Read more about investing via futures and options here.
Investment in Real Estate
Aside from buying Real Estate physically, you may invest in it by buying shares of major Real Estate companies. By tracking the price of these shares you may learn the market sentiment about Real Estate sector and make up your mind about getting into it.
Alternative investments include all uncommon types of investments, like investing in bitcoin, exchange traded funds, indexes, arts, wine, precious stones, and many other types of investment vehicles that do not belong to three main categories: cash, stocks, and bonds.
Alternative investments cannot be defined as high-yield or low-yield as the vehicle could be a low risk and a high risk type. For instance, venture capital and private equity are low-risk vehicles, while mutual funds or some types of precious metals could bring an increased level of risk to your portfolio.
Mutual Funds, Hedge Funds
Mutual funds allow a group of people put their money into a common pool of funds in order to buy large amounts of financial instruments and therefore get a higher profit. The profit is shared among members of the investment portfolio and the expert who manages the pool of vehicles gets his fee. Needless to say but the loss is shared proportionally as well.
Hedge funds are funds for big market players. Basically, hedge funds are same as mutual funds by the functions, but hedge funds operate significantly larger amounts of money.
Investing with the help of a Broker
The fastest and more convenient way to start investing in any vehicle you prefer is to find a broker and use its professional services. The broker is a licensed company or a bank with a direct access to the market that opens an account on your name where you put your funds you wish to use for investment or trading purposes.
The minimum amount for account opening varies from broker to broker, besides, some brokers provide investors and traders with “leverage” or margin – a virtual loan that allows you to trade sums 20-100 times bigger than your actual cash amount. The benefit of a margin is quite controversial: on one hand, an investor operates bigger money and thus can earn a bigger profit. On the other hand, the risk of a loss rises proportionally.
Investing without a broker
You can always invest in a Company you like just by buying shares or bonds directly. All companies have a special page on the website with all the information and instructions the private investor needs in order to make an investment. You will find instructions on how to register within the Company and requirements on minimum amount to invest.
Investing directly without a broker means no need to pay fees, but on the other hand, a private investor doesn’t have an access to all variety of instruments that broker provides its clients with.
The key terms of Investment you should know
Broker – a licensed entity that provides individuals and organization with the access to financial markets through opening accounts. Different brokers offer different pools of investment vehicles available to trade.
Market Price – is the constantly changing current price of a financial instrument, based on the ratio of demand/supply. If the majority of market participants are willing to buy the instrument, the price goes up and vice versa.
Bid and Ask – are the terms used related to the price. “Bid” is the maximum, and “Ask” is the minimum price a buyer is ready to pay for the certain investment vehicle. The difference between the bid and ask price calls swap.
Short and Long – are the terms applied to the act of selling (go short) or buying (go long) financial instruments.
Yield – is the term that defines how much are the dividends that Company pays for its securities. For example, if a company pays 10 dollars for 200$ security, that security’s yield is 5%.
Trend – is the general short-term or long-term direction the price of the vehicle takes, reflecting the sentiment and market players’ anticipations about the certain instrument. There is a downtrend (the bear trend) and the uptrend (the bull trend).
Securities – are the equities, traded on the open market: stocks, bonds, future contracts, options, etc.
Derivatives – are securities (basically the contracts between two parties) that represent the underlying asset (commodities, currencies, etc.). Derivatives are traded independently from their underlying assets.
Margin – is the virtual loan, the broker grants to the client (an account’s owner) in order to let the investor buy bigger volumes of instruments. After the profit is received by a trader, the margin is returned to a broker. If a case of loss, the whole client’s account plays a role of collateral and compensates the lost margin.
Investment Portfolio – is the pool of different types of investment vehicles and assets that that have a different level of risk and profitability. An investment portfolio is often managed by a professional portfolio manager who earns the profit for the clients and receives the fee.
Market Data is the whole set of data from the open market that includes: the price of opening and closing price, the intraday heights and lows, the volume of traded assets and many other parameters that tell an investor how the market behaves.