Cowboy dream investing for dummies
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An investment is based on these components: study, experience and facts. There are statistics data and there are systems that work via them and that can produce a gain in the best way possible. As investor you have to learn to recognize and foster those investment systems that statistically, in the long run, are profitable. But above all, you will always have to deal with risk.
First of all you needs to accept it, because it exist and it will be your ubiquitous travel companion. The financial world is constantly changing, and together with the classical and so to say historical methods, there are now new innovative ones. In this lesson of the course we will explain in very simple terms the main financial investment methods of today and their main features, including also the one with which you may start with very little capital and in a very short time.
Owning one or more shares of a company literally means to be a member of that organization, then to have the right to vote, but, above all, the right to earn from the profit produced by that company, usually in proportion to the number of shares held. However, the peculiarities might be many, and not all companies pay the dividends to its shareholders.
In that case, the shareholder will be able to make money from his investment gaining from the growth in value of its shares, and the subsequent sale to another investor. Conversely, the more a company is weak, the more its shares will be unattractive, people will not want them and they will lose value. This means that if shares pays no dividends, you can only gain from the fact that they increase in value, which in other words means to speculate on the difference between the sale and the purchase price.
Usually the more risky the company to which you have lent money is, the higher the interest will be. Conversely, if the company is considered less risky your investment will be paid at a lower interest rate. Or, if the company knows to be less attractive than others, to attract customers it can put into circulation bonds that pay a higher interest.
The fact that they are called bonds obligation is to indicate that those who receive the money borrowed are obliged to repay the capital, plus the interest on the indicated date. So, we have a fixed date and a fixed return. From one point of view we can say that bonds are risk-free investment, although they are not.
The companies can still fail and therefore no longer fulfill their debts, and never as in recent years we have had firsthand experience of the fact that states themselves may go bankrupt see Argentina. Shares on the other hand can offer much higher yields, but there is obviously a risk that these returns do not come at all. The manager then go with that capital to buy stocks and bonds and build up the mutual fund. The profits are then distributed in relation to the shareholding stake in that fund.
There are hundreds types of funds. Funds that invest in baskets of securities, funds that tend to replicate an index or set of indices, funds managed passively or actively, including the well-known hedge funds. The distinctions that can be done are many. Usually many of these investment funds are hooked on savings plans or insurance policies, and are used by users who are not willing to spend time learning how to invest independently.
The benefits are many in that sense, as well as the disadvantages. The main disadvantages are that the returns on the investment are often very poor, affected in many cases by the high operating costs. In many respects, these tools are used by those who have large investment capacity and uses them to keep their capital away from inflation and gain something if things go well.
In simple terms, inflation means the rising of prices of goods and services, resulting in a reduced purchasing power. Here we enter in the speculation and short selling territory, where you can earn even after the depreciation of a particular asset. In case there will be favorable conditions, I will confirm the purchase or sale option as written, making my investment bear its fruit; if instead the conditions will be unfavorable, I will not conclude the transaction, and I will avoid the loss, but I will of course NOT recover the initial cost already paid.
Within this basic operations there are a long series of advanced strategy, such as the opportunity of selling these contracts instead of buying them, but this is not the place to talk of this topics. Upon expiration of the futures contract, the investor will benefit and gain from the difference between the purchase or sale price established with the future, and the current market price of the underlying asset of the future itself.
Obviously, if this difference is positive, there will be a gain, conversely a loss. The future underlying assets can be both real, such as commodities wheat, gold, metals, coffee, etc as well as financial. Forex is not an investment, but a market where instruments such as options or futures, in addition to the mere purchase and sale the spot market , can be used. In fact, a currency is never bought or sold individually, but is traded on the basis of the equivalent with another currency through an exchange.
Speculators invest on the fact that this exchange between the two currencies will grow or diminish. Options, Futures and the Forex market offers huge earning potential, but obviously, given the law of compensation, the risks grow hand in hand.
In addition to this, the level of knowledge and experience necessary to be able to invest profitably in these areas is very considerable check out our list of the best forex trading sites for beginners. Compared to rely on others to buy stocks, or bonds, or mutual fund shares which does not require time to be learnt , to act personally in these areas for sure takes years of deep and intense studies.
Its key feature is the fact that it stays halfway between the two main categories seen so far: on one hand the simple acquisition of shares, bonds or fund and the passive waiting for revenues on the other hand the retail speculation, with a higher risk index, on the forex or stock market, with futures and options or spot. Thanks to specialized platforms, the investor can view a portfolio of market operators, called traders or Signal Providers , he can observe and compare their styles and performances, and, if interested, he can choose to connect his account to one or more of these traders.
Once the favorite traders have been chosen, the investor can leave his money to work and periodically perform control operations on his investment. Earnings, compared to the amount of capital used, can be definitely higher than those of bonds and even stocks, and also the timing might be shorter.
On the other hand, there is still risk, but with the proper knowledge it will certainly be much lower than the retail Forex speculation, since the investor relies on traders who have already proven to be profitable. We will see in detail the potential of this new form of investment in the dedicated course.
But for now, do not rush, and first terminates this course, because here you will find the most important concepts for the success in any investment, including, of course, with Social Trading. The Time Factor in an investment When we think about the different investment instruments and the investment practice in general, one of the factor that very often discourages most people is undoubtedly time. Hardly ever we have found what we hoped for, in fact many of our desires and our aspirations are often left unfinished.
Just think about that time when we tried to study a foreign language with one of those courses that promised to make us learn it in 24 hours, without any effort, just by listening to the tapes. Then when we found out that instead, to really learn it, it was required a serious study and especially a lot of practice, we immediately abandoned our purposes.
This is what most people does. The time needed for the investments Some, instead, behave differently. Some dwell on the first technique, or even better, they take some time at the beginning to find a technique that seems worthy, professional, suited to their way of being. At that point, they remain focused only on that, and they give themselves the right time to learn it, knowing that every day, spending even just a few minutes, they will become more and more masters of this new discipline.
These people give themselves time, and they also give time to the technique to make sure it expresses the results. When you invest is exactly the same thing. You must have clear in mind that, once you start, you have to leave enough time to your money to work with that strategy. Many make the mistake at that point of not giving time for the strategy to accomplish its cycle.
Too bad for those who had left before it was realized. When also will power is missing The time factor is also the reason why many prefer to entrust their money to other investors, so that the latters will make the choices for them. As recent history has taught us, these people have given control of their money to other people, they trusted them, and this trust, unfortunately, has not been repaid.
And that is when they get bad surprises. In your opinion, a company that has strong interests in construction companies, will not use your money to invest in buildings? If they would have done so decades ago it would have been a bargain. But if they still continued to do so while the housing bubble was bursting, the story would have been different. That would not have been reasonable expectation, but only personal interest.
Linked to the time factor, there are also the expectations on how much and how quickly you want to earn. Even here the situation is simple, ie, to make your money work intelligently and as safe as possible, it takes the right time and the right approach. As you have seen, the right time is needed for your investment to make its cycle and demonstrate that reasonable expectation.
The right setting of your strategy is fundamental to allow your fund to survive in any circumstance, to resist in the negative situation, and to have always the strength to start again. If your intent is to double or triple your capital in a few months, I assure you that, within a few months or even less, like a few weeks, your account will be halved, if not burned completely.
To find out if a gain percentage in a short time is too exaggerated, try to convert it into a loss, and ask yourself if you can accept it. I mean you must be able to access the data of all it has done for at least one year, with the help of special tools that can make it easy to read them. And if you have 2 or 3 years, even better. Of course, there may be exceptions, but these are good starting points. In normal cases, if the conditions that have led you to make a certain kind of choices remain valid, then you have to leave enough time for your investment to work, and a year is usually the right time to be able to draw your own conclusions.
Then, there is the time you have to give yourself to learn this new discipline. On this factor, now you have an edge because we have created a complete path to show you how to invest with this new opportunity called Social Trading. But please, do not jump immediately ahead, remember this lesson, give yourself the time to read all of the courses, at least once, but even better if you read them twice.
Metabolize all the concepts. Then start. If you make one accurate step at a time, you will arrive straight and precisely to hit your goal. Those instead who run in a disorderly way and jump the steps, they are more likely to miss completely the target. Do you know that it would take me at least 2 years to invest and get the result I want?
How to set a proper investment goal for you Knowing how to set a goal is something very powerful for an individual psychology. However, doing it right is not so obvious, and it requires good analytical skills, but not of external factors as you might think. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.
When you invest, there are the goal you want to achieve, and the related risks. Knowing the risks associated with the achievement of a specific goal is really the starting point for a good investment. It would not make sense to start any activity without first having established what would be the risks.
To continue without knowing them can easily turn into irresponsibility. Second investment goal: knowing yourself Once your goal is clear, and then you know all the risks related to it, at that point you have to make another type of analysis, but directed toward yourself.
You have to be honest, to admit your limits, to predict your possible reactions and your tolerance levels. Which of the two investment strategies would you choose? Many respond without fail that they would choose the former. And for many this would indeed be the best choice.
Although it is not easy, try to imagine how you would feel if after 3 months you would have not yet accumulated a single dollar of earnings, but rather you would see your account totally halved. I can assure you that for very few in the world that would not be a problem at all. Nobody likes losses, and losing half of the capital can really be a bad shot. Anyway, in losses you can also discover the spirit, the courage and the steady nerves of an investor. In fact, the savvy investor who had used the strategy 1, passed those three months and finding himself without half of his account, would analyze again all the conditions that led him to choose that strategy.
He would pass them all in an analytical review and would reason with a clear mind. He would conclude that the right conditions are still in place, so he would decide to continue with the strategy, and he would then be rewarded. After the negative moment, the strategy begins to scores excellent profits and in the following nine months the account recovers all the losses and reaches its target even before the year.
Now, this is just a fantasy scenario, and with a nice happy ending, but you can imagine how many would not be comfortable at all with that kind of risk, despite the prospect of the saved time might be interesting. Many people, knowing themselves and their possible reactions, would prefer to choose a safer way, that arrive at the same result, in twice the time, but also with less than half of the risks.
Knowing yourself also means being aware of the condition or situation you find yourself in. A pensioner may have a different time horizon from a young worker just come of age. But not necessarily. A pensioner might want to invest on a very solid and contained plan just to save his retirement from inflation. Or he might want a more ambitious plan for a portion of his savings, to try to leave something more to her grandchildren.
Or he might aim to double the capital in 2 years to buy the car of his dreams, and because of that is willing to risk more. These are all examples to make you understand how the goals may vary depending on the personal circumstances of each one of us. So, do you know yourself deeply enough to understand what your goals are and the risks that you would be able to bear? How to invest and work at the same time In the introduction we said that investing means, very simply, to let money work for you, in your place.
The answer is still very simple. The methods are only two. But to give a complete picture we need to say a few words for the first method too, and perhaps these few lines would be the most important to allow a real change in the financial life of every person. If you are like most people, as almost all of us are, you are an employee of an employer, either the state or a private individual, that every month pays you the hours of work that you have done for him.
At that point, what do you do? You take that money, you go to the bank and you pay the mortgage, you go to the car dealer and you pay the car, you pay the expenses of the home, you pay the debts, you pay for medication, and maybe you also pay your child the pocket money. But what is the meaning of all this trivial speech?
What does it mean? It means that the first thing to do, whenever you get the money you earn through your work, is to take a part of it and put it aside. The best method is to open another bank account and transfer there the sum every time.
So, do it immediately. To pay yourself first every time is the most important step to obtain those resources necessary to aim at your financial freedom, a freedom that can be achieved just through the investment practice. Investing for not working Going back to the introduction, at this point, many think they have to work and pay themselves many years before they can have enough capital to invest, always convinced that for investing big capitals are needed.
As we have already said, this is absolutely not true. Therefore, if you invest with a k , you most-likely are investing in mutual funds. Again, the main difference between ETFs and mutual funds is how they trade. Instead of trading in real-time, mutual funds trade once-a-day after the market closes. And, not only did you want to sell out of that mutual fund, but so did thousands of other investors.
Initial Investment A second difference is the minimum initial investment. With ETFs, you only need to pay the price for one share. The third difference between mutual funds and ETFs are fund expenses. Most mutual funds have higher fund expenses than similar ETFs. Index Funds Oftentimes, these may be your only investment option in a k plan. Index funds are one form of mutual funds. They track a broad market index. This means they try to match the market performance with passive investing.
As a result, they have lower fund expenses than active funds. It invests in 3, of the largest publicly-traded companies. To save you money, many online brokers now offer index ETFs and you invest by the share. And, it only has an expense ratio of 0. You might decide to go with the ETF because of the lower fund expenses.
With a 0. Many experts believe ETFs will soon completely phase out mutual funds including a financial advisor with over years experience interviewed on the Money Peach podcast. Money Tip: If you have a k, a great free tool to see what fees you are paying is Blooom. Target Date Funds Another mutual fund option is target retirement date funds. If you want to retire in , you choose a fund. But, you should still make sure their investment goal matches your goals.
And, that the actual performance meets your expectations. These funds invest in a basket of stocks and bonds. They also hold index funds to keep fund expenses low. As you near retirement, the fund swaps stocks for bonds. These funds are a low-maintenance way to invest. However, more effort goes into managing these funds than an index fund, therefore you can expect to pay a higher expense ratio for them. Therefore, your bond is now more desirable which means the price of that bond went up.
Similar to how a stock goes up in value, same holds true for a bond. The easiest way to remember how bonds work is this: As interest rates go up, bond prices go down. As interest rates go down, bond prices go up. Breaking Down the Dividends Earlier we mentioned dividends, which were profits of the company distributed back to the shareholders.
Many dividends are distributed at least once a year, but they can be paid out monthly, quarterly, etc. Interestingly enough, most index funds pay them in December. In a nutshell, compound interest is literally where your money makes money for you. As you can see, your money is working for you by earning interest on the original amount AND the interest earned from the year before.
As this plays out year-after-year, the amount begins to compound…. One amazing way to further increase compound interest in your favor is by reinvesting your dividends. I would start with M1 Finance for a few reasons: You can invest in partial or fractional shares. The reason why I like this concept is purchasing a single stock can be expensive! With M1 Finance, you can purchase Amazon with even just a few dollars. These goals can range from beginner investing, retirement planning, or even a more tailored responsible investing approach.
In fact, M1 Finance does not charge any commissions or markups on trades you place. Your Employer k Plan The most well-known place to invest is inside your k plan. The main reason why is for matching k contributions from your employer. If your employer offers a match, maximize it!
After you meet the match, you might decide to invest more. But, not all k plans are the same and some have some terribly high fees and very lousy investment choices. A great tool I personally use to check for k ,b, a fees is Blooom. You must pay taxes every year on your non-retirement account investments. With a pre-tax k, you will reduce your taxable income.
Are There k Tax Disadvantages? Financial expert Rebecca Walser was on the Money Peach podcast with a completely different point of view about the k. You can listen to the interview below, but in a nutshell she explains: How we are in the lowest tax environment in U.
Therefore, her debate is whether or not the k is a good plan right now. If taxes do increase, then we would actually be avoiding the lower taxes now to pay higher taxes later. Instead of paying taxes when you withdraw the money, you pay taxes today and then invest into the ROTH k.
Just like the k, your growth is also tax-deferred. You fund Traditional IRAs with pre-tax income. And, Roth IRAs receive your post-tax income. No k Plan Available? There are so many very simple platforms which are perfect for someone getting started or even a seasoned pro. One of the most well-known and trusted investing platforms is Betterment. In my opinion, Betterment hits the nail on the head when it comes to simplifying the investment process. They only use stock and bond ETFs and they help you choose your investments based on what your goals are.
Also, Betterment is flat out affordable. Whereas a financial advisor will usually charge between 0. Below are three additional reasons why you might invest with Betterment. Tax-Loss Harvesting Betterment uses tax loss harvesting to reduce your annual tax bill.
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