definition – investing:
Investing is, to put money, effort, time, etc. into something to make a profit or get an advantage. This article will focus on Financial Investing. None of us have a crystal ball, so future is uncertain. This presents risks, but also opportunities when investing our money into financial products. Whether it’s the safest option of an interest paying savings account. Or the stock market, where there is a risk of the entire investment going to zero.
A higher risk profile tends to generate the potential for higher reward. This is one of the main guiding principles in financial investing. Another key investing principle is the time value of money. That is, $100 in a year’s time is worth less than $100 today. This can be understood in the way of opportunity cost of investing money.
For instance, you buy stocks with $100 today and plan to hold it for a year. And savings accounts pay 5% annual interest. Then $100 today, would be $105 in a year, if you had invested the money in a risk free savings account. So, you would want to generate more than $5 return. This is because you are investing in stocks, and so a high risk of losing your entire invested capital. Hence, you would expect a much higher return than $5 that you would have got in a risk-free saving account.
5 golden rules of investing
- Investing for high returns requires accepting high levels of risk
- Diversify the pool of assets you are investing in. So that risk specific to one entity(issuer, company, country, asset etc.) is minimised.
- Investing should ideally be done over the long term. That is, a period of 5 years or more. It is likely that when investing over the long term, volatility will even out, so you won’t be penalised for taking money out in a down market.
- Rebalance portfolio at regular intervals. As you grow older, your risk appetite will change. In addition the markets sectors will shift. For example, from energy to technology in 2000’s.
- Keep calm when investing in an underpriced market, even if the markets are in a panic state. Taking out money in a down market will lead to large losses.
types of investment
- Bonds – One of the biggest market by total assets in investing landscape. Debt issues by sovereigns and corporations is used as investment vehicle by all wealth, pension funds and asset managers. Also, bonds market is full of assets with a wide a variety of credit ratings, maturity and coupon rates.
- Cash – In cash investing, money is typically invested in short-term, low-risk investment vehicles like certificates of deposit, money market funds, and high yield bank accounts.
- Real Estate – Investment in residential real estate is the most common form of real estate investment measured by number of participants because it includes property purchased as a primary residence. In addition, there are pooled mortgage securities and Real Estate investment trusts/funds that can be used to get exposure to the real estate market.
- Stocks and shares – This involves investing in a share in the equity of a company with the expectation that the share price will increase. In addition, there is expectation of regular income in the form of dividends. Investing in a share in the company is the same as owning part of the company. Stock investing can be in the form of buying individual stocks, mutual funds, index funds and exchange traded funds (ETFs).
- Alternative investing – Films, Farmland, Art (Paintings), Vintage Cars, Wines( Vineyard) etc.
difference between investing and trading
time horizon of profits
Trading involves frequent transactions, such as the buying and selling of stocks, commodities, currency pairs, or other instruments. The goal is to generate returns that outperform buy-and-hold investing. On the other hand, the goal of investing is to gradually build wealth over an extended period of time. For instance, investing in a company will mean that the company will use the funds for growth. It may spend the money on advertisement to acquire new customers. And therefore enable growth in revenue. This will mean higher dividends for the investors and growth in stock price.
cut losses vs ride the loss
In trading, the goal is to maximize daily, weekly, quarterly profits. So, a trader will close loss making position quickly to free up the capital and margin account balance. This is done to minimize the opportunity cost of the capital. He can then employ this capital into a new trading opportunity to generate profits. While, when investing over the long term, you are more likely to ride out short-term losses, as you have a long term view.
type of assets
Day traders tend to use derivatives like Futures and CFD’s to speculate on an underlying asset. This is because their intention is to profit from the movement of an asset. So, they have no intention of taking delivery of the underlying asset. Hence, day traders tend to use margin accounts with broker or prop. trading house. In contrast, investors tend to hold the assets. They do this as it minimises their cost of transactions which can add up to a significant amount when investing over the long term. However, investing occasionally requires holding derivatives to hedge short term market/credit risk.
final comments
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this?
STOKAI provides daily prediction using algorithms based on all factors that impact commonly traded assets. Then, it evolves the forecast over 10 days in the future. Tutorial and brief user guide is available here – Tutorial. If there are any issues, please contact our customer services team.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.