For the newbie to the financial scene, it’s important to differentiate between saving, trading, and investing. Saving is simply socking money away for the future. Money can be saved through various means such as an interest-bearing bank account, a government bond, or simply sticking it under your mattress.
Trading and investing are entirely different. Trading involves buying and selling financial instruments for profit. Investing takes a long-term perspective on capital appreciation and profit generation. In other words, trading is tactical while investing is strategic. Day traders, swing traders, and investors can improve their savings by adopting a mix of traditional savings, trading and investment strategies.
How do you go about investing?
Investments require research and understanding. If there is ever any doubt about that, ask the following question: Would you entrust a considerable sum of money to a stranger who promises you healthy returns? The answer is invariably no. In much the same way, it’s important to understand where you are investing your money, how you are investing your money, and what to expect when investing your money. There are typically 4 asset classes available to investors. These include stocks, commodities, indices, and currency pairs. Other burgeoning investment opportunities include cryptocurrencies.
The purpose of an investment is to generate a return on your money over time. There are several factors that need to be considered including your age, your personal disposable income, your investment objectives, your appetite for risk, and how comfortable you feel investing on your own or with a broker. Various fees and commissions are always tacked on to investments, so bear this in mind when plotting out your long-term plan. As always, it is imperative to read up about the performance of the underlying financial instrument, micro and macroeconomic variables that may impact prices, and geopolitical factors too. Here are several examples of financial instruments available to investors:
- Stocks – these include British Petroleum, Google, Amazon, Yahoo, Anglo American, Randgold, BHP Billiton, and the like. When investments are made in stocks, the assumption is that the stock price will appreciate over time and profits will be generated. There are several types of investments in stocks, notably mutual funds, exchange traded funds, and individual stocks.
- Commodities – commodities include gold, silver, wheat, iron ore, Brent crude oil, WTI crude oil, copper etc. There are hard commodities and soft commodities. Commodities are typically purchased in futures contracts.
- Currency pairs – currency pairs include the GBP/USD, GBP/EUR, GBP/AUD, GBP/JPY, USD/CAD, USD/CHF, USD/RUB etc. When you trade currency pairs, you’re buying one currency and selling another currency in the same pair.
- Indices – indices include the FTSE 100 index, the FTSE 250 index, the CAC, the DAX, Nikkei 225 index, Dow Jones, NASDAQ, S&P 500 etc. The index tracks the performance of a group of listed companies. Some indices are technology driven such as the NASDAQ, while others are focused on industrials such as the Dow Jones.
Important factors to consider when investing in financial instruments
There are also cryptocurrencies like Bitcoin, Ethereum, Litecoin, Ripple and 1,500+ others across over 10,000 markets. Cryptocurrencies are a new asset class that are based on blockchain technology, and the entire sector is worth several hundred billion dollars today. It is an extremely volatile market, with dramatic daily price fluctuations and high variance. Your decision to invest hard-earned money in any of these, or other financial instruments is predicated on your personal preferences.
A young investor can afford to take more risks since he/she has a longer investment horizon. An older investor is probably looking to safeguard funds and prefers more stable stocks and financial assets. Other issues to contend with include investment goals and objectives. Saving for a home, a college education, or retirement requires different strategies. For all of these reasons, it’s important to know how to start investing. This is not a decision to be taken lightly, and expert insights, analysis and feedback can make the difference between being a successful investor and losing the proverbial shirt off your back.