Here on R Blog pages, quite a lot has been said about investments. To be more precise, my colleagues have already posted: "Long-Term Investments: How to Choose Stocks?", "Investing in PAMM", "CopyFX: Your Helper on Forex" The investment theme is quite multifaceted, it deserves a look from different angles and focusing on its individual aspects. But this post is more likely to be interesting for beginners, who are only groping their way in the world of investments and are only thinking of taking their first steps in this direction. Here I plan to talk about my vision of this topic and try to encourage the further study of investment options in more detail.
A modern person is in constant search of income sources in order to meet their everyday needs or buy an expensive thing. However, spending all money we earn, we do not take into consideration one fact: the guarantee of our further success and financial stability is preservation and enlargement of our capital. The most efficient way to achieve them is investing. Let us look into making profit on investments, sort out the assets that are the best for investing, learn to assess investment risks and to choose the most suitable invest projects.
You can keep your savings in cash (in your national currency as well as in such popular currencies as the US dollar or euro). Anyway, you should remember that the real value of cash is decreasing constantly due to inflation.
This problem can be solved by investing your savings. Investing helps not only protect your capital from depreciating but also augment it. That is why you should think not only about saving money, but also about making profit on investing it.
There are plenty of ways to invest money these days, including purchase of stocks, bonds and other securities; opening bank deposits; participation in share funds, invest projects; trust management; investments in business projects, real estate, gold and other precious metals. Below we shall discuss the advantages, drawbacks and main characteristics of these ways, but whichever type you choose, the main thing will be your desire to invest, in other words, to make your money work for you.
You should always remember that investing is not gambling, you should not put your money into the very first projects or funds you come across just because they promise large returns, or buy securities on all your capital.
You should not hope for quick profit either. Your first and foremost goal is to save your money and provide for its sufficient yield, as investing is always connected with the risk of losses. However, risks should be reasonably limited, and your funds distributed between different assets for diversification.
Deciding where to invest your capital, you have to answer some questions related to the earning power of your investments, the expected risk, the period of the investment and the size of the latter. Choose what is more important for you: high revenue or stability of your investment. As a rule, the bigger the yield of the investment, the higher the risks, so you should make a firm decision upon the acceptable risk level.
To define the direction of your investments you can grade them on the basis of the risks – from almost zero risk on bank accounts to virtually unlimited on doubtful assets.
The period of investment also influences the choice of the asset directly. If you are planning to invest for no longer than 6 months, your best choice will be short-term bills retired at the end of the term or depositing your capital on a bank account. If you are planning an investment for a period longer than 6 months, you had rather put your money in mutual investment funds. For longer period investments such assets as stocks, bonds, precious metals and real estate can be considered.
The sum of investment defines the sum of the profit as well as the choice of investment strategy. Some assets are available for large sums only - for example, if you own more than 100,000 USD, you can consider real estate as your investment object. On the other hand, those owning small sums around 100-200 USD are limited in the options by investment projects, mutual funds and business projects. In case trust management is regarded as a possible investment goal, the minimal sum here is 10,000 USD.
Your investment experience also counts. For example, if you have a rather long experience of trading on financial markets, you can choose stocks and other securities yourself, as well as trade gold and other precious metals on the futures market.
In case you do not have such experience, it will be better to trust your capital to professionals, investing in funds or giving money for trust management.
Remember that any investment is a risk, so for those who own rather large sums it would be better to distribute their assets between different assets, managing their earning power and risks.
Deciding upon the strategy of your investment, you should thoroughly analyze the market, assess possible risks, the yield, the trustworthiness of the asset and only upon this analysis make your decision. What is more, you should pay attention to additional expenses, connected with investments placement, such as commission fees, extra charges, taxes, services, etc.
Investing in real estate
If you are interested, there are two main options of investing in real estate.
Purchase of a property unit. In this case, you may be aiming at 2 things:
The first one is leasing out the property and receiving monthly income; the second one is reselling. Here you can go several ways, purchasing your real estate at once for your own money, or in installments, or on a mortgage.
Investing in building projects. Here you do not become owner of a property unit or its part, instead, you receive income from your investments. In case you leave the project, you may take away your part of the profit. There are two ways of investing in building projects: become a member of mutual fund or invest directly into a particular building project.
Participation in invest projects, as well as purchase of real estate, imply significant expenses. What is more, investing in projects, you risk losing your capital, if the project turns out a failure. However, such investments may yield bigger profit in case the project turns out a success. What is more, the owner of a property unit will have to maintain it, search for tenants, while investments in projects are not time-consuming, as long as all technical and organizational issues are sorted out by the companies that have launched the projects.
Buying real estate, you should keep in mind that you will have to spend a large sum of money on the purchase that you will not be able to cash out quickly in case of emergency. Conversely, if you invest in a close-end fund, you can exit it and receive your money back relatively quickly and easily.
Investing in gold
Gold is another popular investment asset. How to make profit on investments in gold? The answer is the price for this precious metal, or, more exactly, the fluctuations of this price.
There are three ways of investing in gold:
- buying a gold bar at a bank;
- opening a bank deposit in gold;
- opening an account at a broker company for trading gold yourself.
The first two variants imply that the accounts will be open for no less than a year. Buying gold bars, it is recommended to keep in mind the bank spread, i.e. the difference between the price of purchase and the price of sell, choosing the smallest one. Opening a “gold” deposit, you can either by gold physically or not. Your deposit will be bound to the gold rate. Deposit without purchasing physical gold is more profitable. It also should be noted that investments in physical gold or “gold” deposits have their entrance thresholds, so if your savings are no more than 1,000 USD, it is unlikely that you will find an acceptable investment option.
Interest rates on gold deposits are sally about 5%. However, the idea behind investments in gold is not so much earning on the interest rate but rather making profit on the fluctuations of its price. That is why it is so important to pay attention to the price policy of the bank and the spread.
The drawback of the first two variants is the fact that if you need to cash them you may lose some money on the spread and the expertise fee (as with gold bars); or you may miss the rate on the deposit. That is why people often choose the third option, which is opening an account at a broker company for trading gold. In this case, you can make profit on the growth of price, buying gold, as well as on the fall of price, opening selling positions.
Trading gold on an account at a broker company, you should use money management and calculate the ratio of risks and possible profit. The advantage of such investments is the possibility to earn substantial profit quickly and withdraw them from the deposit equally quickly if necessary. What is more, this variant of investing in gold allows for making profit both on the growth and decline of the price. However, you should keep in mind that way of investing is riskier, compared to the other two, as one bold action may lead to the loss of the whole sum.
Investments on financial markets
One of the ways of investing via the Internet is trading on such financial markets as Forex, the futures market, the stock market, CFDs, trading options. You can:
- trade on the market independently
- trust your capital to a managing trader
- invest in PAMM accounts
Trading independently, you can buy and sell securities and secondary instruments, using leverage to enhance your financial possibilities. When playing yourself, you define the size of your deposit on the basis of your trading capital; broker companies nowadays allow for starting with any sum. However, individual trading, in case of a lack of experience and abilities, may lead just to losing all investments. That is why you should think twice before starting your own trader practice.
Compared to independent trading, making profit out of PAMM accounts is much easier. However, before investing it is necessary to select acceptable conditions and weight up the ratio of the expected risk and profitability. You should pay attention to the reputation of the broker company you open your account at, and your managing trader; also, analyze the statistics of profitability of the PAMM, carry out a comparative analysis. The advantage of investing in PAMM accounts is a rather low entrance threshold, depending, however, on the rating of the PAMM. What is more, you can limit the maximum risk when choosing investment conditions.
Signing a contract with an individual trader, you, as investor, choose a broker company to open your account at, the size of the maximal drawdown, i.e. your risk, and agree on your average monthly return and expected profit. As long as the trader will work directly on your account, the minimal sum of investment may start from 10 thousand USD, depending on the trader's category, experience, profitability of their trading system and other factors agreed upon with the trader.
Pooled investments, mutual funds
Another way of making money on the Internet is investing in mutual funds. Before you ask yourself a question how to make money on them, we will give a brief explanation. A mutual fund is a collective fund of monetary investments of shareholders, invested by the management company in various assets, such as stocks, bonds, etc. Investing in a mutual fund, you purchase a share of the fund; it is a security that you can sell, pledge, demise.
Mutual funds can be:
Open-ended funds invest their money in the stocks of large companies, bonds of trustworthy borrowers and other highly liquid assets. You can buy or sell your share of such a fund at any monent. In case of a close-end fund, its shares may be retired only after the contract of trust management expired (above we have spoken about the funds that invest money in real estate). Shares of interval funds can only be bought or sold during specified periods of time, normally once in a quarter.
The profitability of a mtal funds is much higher than that of bank deposits and may reach 100%. At the same time, it is worth keeping in mind that profitability in the past does not guarantee the same success in future. Also, take into account the period of investment: the shorter it is, the higher the possibility of selling the share at a price equal to the price of purchase.
Choosing a mutual fund, you should also take into account in what assets the money will be invested. For example, funds investing in stocks and fund indices yield more profit and the same time more risk then mixed funds or bond funds.
Investments with increased risk
Another type of investing on the Internet is high yield investment programs (HYIP). If you are eager to make profit on investments quickly, such projects will be your best choice. However, remember that HYIPs exits for a rather short time from several weeks to (normally) a year. And their high yield is explained by very high percents on investments.
To make money on investing in HYIPs, you should gather information about them carefully and invest for short periods of time. It is also worth noticing that not a one HYIP guarantees you return of your investment. In other words, you invest at your own risk. To earn on HYIPs, keep in mind that such projects close all the time, visit the monitoring annually, keep an eye on the situation and withdraw your money as often as possible.
So, answering the question: "How to make money on investing?", we have discussed the most popular options of saving and increasing your capital. Our advice to a beginner trader will be:
- do not rush at investing
- study each available option carefully
- invest only your own money, avoiding loans
- diversify your risks - divide your capital and invest in different objects