The last part of our series describes some of the advanced options that investors can use to leverage their returns. If you’re just joining us, you can catch up by reading Monday’s, Tuesday’s, Wednesday’s, and Thursday’s editions. In essence, the goal of the Becoming a Better Investor series is to simplify the investing methods employed by average individuals. Typical investors overcomplicate their portfolios, and pay for it when the market moves in a direction that wasn’t prepared for.
Thus far, we have focused on protecting capital, generating cash flows, and creating reaction strategies. A small portion of the portfolio should be used to exercise speculative plays in the market. With the decline in trade execution costs and the potential for noteworthy percentage gains, investors should carefully consider their toleration for risk. Listed below are some ideas to explore for investors that are curious about calculated risk:
1. Options Contracts. Options contracts are derivatives that give investors the right to buy or sell a security at an agreed-upon date in the future. The overwhelming incentive here is potentially significant returns with a known and relatively low risk. As an example, say you buy the right to buy a share of Apple at $500 a share on December 31 for $10. If the stock is trading at $600 on December 31, then you can buy the stock at $500 and immediately sell it for a $90 profit. With only $10 risked, you gained 9 times that amount.
2. Foreign Exchange. Trading the currency markets isn’t for the faint of heart, but it provides ample opportunity for low-barrier market participation. Many brokers offer leveraged accounts with low balance minimums, in addition to practice accounts. A remarkable component of foreign exchange trading is the round-the-clock nature of the market. In the United States, currency markets are effectively open from Sunday night until Friday afternoon.
3. ETFs. ETFs provide investors with an excellent chance to speculate on sectors, countries, and much more. Because they are traded like stocks, the securities are often quite liquid and provide ample opportunity to exploit market ebbs and flows.
4. Emerging Markets. Many investors have already heard of the BRIC nations – Brazil, Russia, India and China. This is only scratching the surface of the many countries that are experiencing economic growth that can be capitalised on. Especially in Latin America and Asia, individuals shouldn’t me intimidated from speculating on markets around the world if they properly protect themselves.
5. Technology funds. With the recent jump in interest in technology-based companies, several noteworthy firms have created investment vehicles to catch the wave. Goldman Sachs, J.P. Morgan, and several others, have created special funds to invest in social media companies, developing technology, and start-ups. Be on the lookout for funds with low entrance amounts and low transaction fees.
There are innumerable possibilities that emanate from global markets every day. Fortunes are made and lost every day, and investors must be cognisant of the risks and realities of portfolio management. Below are a few departing pieces of advice as you move forward:
1. Diversify, diversify, diversify. Even when you feel comfortable with your risk exposure at a given moment, constantly be on the lookout for new possibilities to increase value.
2. Be patient. Trust the hard work and research put into the structure you chose. There are inevitable market dips, but are they cannot come to define your emotions.
3. Enjoy the ride. Investing can provide a challenge, growth opportunities, and the possibility of developing new skills. You might be surprised what emerges.
We at Benzinga wish you the best of luck in your market endeavours.
— Nick Smith