Introduction to Investing

Earning an income and creating wealth are two different things, people who have understanding of active and passive income strategies are well aware of the fact that earning a steady income month by month does not lead to wealth creation because even if our income is high, it is constantly eroded away because of inflation and continuous withdrawal rate.

Wealth creation is possible when we start saving a portion of our income and invest it in profitable investment options. Over time this saved income starts to multiply exponentially. This is the path for wealth creation and it requires some knowledge of investment options. Because you can`t just invest your hard-earned money just like that without knowing what you are getting into.  If you are a beginner in investing, it is good to do research and due diligence before testing the waters.

It is always prudent to carry out due diligence before investing your money into any investment option, get to know the intricacies of the option you are looking to invest into.

So let us look into some investment options.

Day Trading

Day trading is the purchase and sale of a security within a day. This means that investors purchase securities and sell them within a single trading day. Why do they do this? Simple, to earn profits. Day trading requires a degree of expertise and knowledge of the market and industry, most day traders are well educated, know the intricacies of the market they trade in and are well funded. Day trading is prevalent mostly in the foreign exchange (FOREX) and stock markets because these markets, in particular, are well suited for day trading.

Basically day traders use their knowledge and experience to speculate the rise or fall in the value of securities they trade in, based on this judgment they make buying and selling decisions to make profits on small price movements. For example if the day traders know that a major car review magazine is going to publish a positive review on Tesla, then the day traders will speculate that this review will result in a rise in the stock price because more investors will want to invest in Tesla because of positive review, thus the day traders will buy the shares before the interview is published and sell the securities once the share prices spike.

Day traders know the intricacies of the market and thus scheduled news and announcements such as economic statistics, policy reveals, press briefings, earning reports etc which result in spikes in market are watched closely by the day traders because these spikes have the potential of giving them profits.

Find books on day trading here

Long Term Mutual Funds

Mutual funds are a type of financial vehicle (special purpose company) which is made up of a pool of money that has been invested by many investors. The investors invest their money in mutual funds so that it can be invested into securities like stocks, bonds, financial instruments and other investment options. Mutual funds give investors access to a professionally managed, well-diversified portfolio. The sharing ration in a mutual fund is proportional to the amount of investment.

Most mutual funds operate with a specific objective and purpose and thus their investment portfolio reflects the stated objective. Mutual funds are managed by professional fund managers whose job is to invest the funds in the most efficient manner possible to maximize the gains for the investors participating in the fund.

Investors can invest in mutual funds for the short term or the long term, short term gains are low whereas long term gains are high because in the long term the money can be reinvested to produce exponentially increasing returns.

Find books on long term investments and mutual funds here

Forex Market

Foreign exchange (FOREX) refers to the market where currencies are traded, currencies are traded in pairs because if you want to buy one currency then you have to sell another currency. Therefore if one currency weakens this means that another currency must be strengthening against it. Consider the FOREX market like a see saw, whenever one currency weakens another must strengthen against it. This strengthening and weakening of currencies is related to economic indicators, rate of inflation, interest rates, current account balance etc and this presents investors with an opportunity to make profits by speculating on the movements in the FOREX market.
In order to be able to make profits from the movements in the FOREX markets, the investors have to be knowledgeable and know the intricacies of the market. So, this requires a degree of experience in the market. For a keen eyed investor, the market conditions and other factors which have been mentioned above, indicate the movements which are about to occur in the value of currencies and this allows the investors to make speculative moves to buy or sell the currencies to profit from the short term changes in the value of currencies.

Find books on trading forex here

Options

Options are financial instruments used to hedge currency or interest rate risk. Currency options protect against unfavorable exchange rate movements while allowing the investor to take advantage of favorable movements in the exchange rate. Currency options are particularly useful when it is not sure whether the cash flow will occur or not.

As the name suggests, an option is basically an option. It gives the investor an option to exercise it if the exchange rate if favorable, if it is not favorable then the option does not have to be exercised.
Interest rate options allow an organization to limit its exposure to adverse interest rate movements while also allowing it to take advantage of favorable interest rate movements. Like currency options, interest rate options grant the investors or buyer of the option the right but not the obligation to deal at an agreed interest rate at a future date.

Find books on trading options here

Interest rate options are used mainly by organizations to hedge the interest rates on their loans. Investors typically use currency options to hedge the risk of unfavorable exchange rate movements. Once again, the investors need to be a well versed and knowledgeable when dealing with options because they require a degree of technical proficiency. Suppose if an investor has to pay 5000 Euros 2 months and the home currency of the investor is expected to weaken against the Euro, then the investor can hedge this risk and buy an option to buy 5000 Euros at a price agreed today. 2 months later on the date of exercising the option, the investor can analyze if the exchange rate has weakened or strengthened. If the exchange rate has weakened according to the expectations then the investors may exercise the option and prevent his loss and if the expected change has not occurred then the investor may not exercise the option allowing it to lapse and trade using the spot rate that is more favorable. In this manner, currency options allow investors to hedge risk and avoid losses.

Originally posted 2019-11-06 06:24:56. Republished by Blog Post Promoter