Stocks and bonds had traditionally been one of most popular ways to earn more lucrative returns comparing to interests offered by traditional banks. With the proliferation of Internet the investing in stocks and bonds has became even more accessible and wide-spread and popular for amateur traders. And few of us did make a buck out of it but before you leap to sign yourself for an on-line investing account, beware. Gains are much higher but so are risks…
Legal note (sorry folks, as much as I love to write I must make sure I am safe as well).
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Gains vs. Risks
While most of bank deposits are insured by FDIC insured and protected (Federal Deposit Insurance Corporation www.fdic.org) in USA, protecting at least the deposit you started with, investing in stocks and bonds does not shelter your deposit (money you initially invested). You could loose much of your investment or all of it and in cases of some advanced trading options accumulate additional debt which you have to pay at the end. So where there is an opportunity for a larger windfall so is the greatest risk of shortfall.
So, if you are ready to explore world of investing, ask yourself are you comfortable with loosing portion or all money you are investing and how much of the loss can you withstand in case things go bad. If you can afford certain amount without causing the hardship for you (you are not investing resources that you need to live and sustain yourself and/or your family and you can sustain loss of some or all of money invested), than you can move to next step. If you are not willing or cannot afford to take a loss than stay away from stocks and bonds and look for more traditional instruments to invest.
The First Step Self Assessment
The first step of your investing project is to self assess yourself. Traditional versus aggressive trader. Even in stocks and bonds world there are options that are safer or riskier than others. Usually the higher the risk is the higher is the potential for the gain. So before starting to trade you have to decide what makes you comfortable, safe-traditional trader or high yield-aggressive trader. And whatever you do, do not lie to yourself and pursue aggressive market if your guts tell you this is above your comfort zone. You may upgrade yourself at some time depending on your experience and situation but when you are saying you are ready to be more aggressive trader, make sure you really are ready.
There are many ways to trade. Regular buy-sell, short sell, swing trade, traditional stocks, penny stocks, futures, commodities, forex, there is so much one can do. Make sue you do not go everywhere and anywhere at the beginning. Stick with one area and master it before doing something else. Traditional day trading is the best and safest choice to get your feet wet.
Broker assisted versus on-line.
Traditionally trading was conducted in past via broker who for a commission fee was buying and selling stocks according to your instructions. Fees were typically about $35.00-$50.00 per trade. This is still considered the safest way to trade as your broker is not just there to execute your requests but as he/she develops relationship with you, he/she will also become a trusted source of information and advice and your strongest support pillar to protect and shield your funds.
There are many brokerage houses there and each has variety of brokers. Make sure you interview and research about the brokerage house and broker him/herself before you choose which one to choose. You want to be comfortable with whomever you decide to trust.
Ask what your options are, what risks, what commission fees they will charge, what they will give you in return, etc. The cheaper is not necessary better.
If you are comfortable with your trading skills and require no assistance from a broker, you may save yourself some money by opening a self-serve on-line trading account. On-line trades usually cost around $10 per trade and there are some places that will give you certain number of trades without charging you any commission. Zecco (http://www.zecco.com) is an interesting choice with the twist. They give you 10 trades a day (maximum 40 trades of month) absolutely free (no commissions). $3.50 per trade over limit. This is not the promo or limited time but lasts forever. Your quota is reset every month and therefore you are granted another 40 trades safer the current month expiry. At an average commission fee of $10 per trade this service on average will save you $400 or more in fees per month giving you an extra profit margin and edge to succeed and profit. You have to fund your account with a minimum initial deposit of $2500.00. they offer a variety of research tools as a part of your account so in my opinion a well-worth place to explore and consider.
If you will not or cannot use Zecco, there are many other places to open the account. Just search the Internet and you will find abundance of places to look at and talk to.
Practice makes perfect.
If you are considering getting your feet wet with the on-line training but wonder how well you will do, you can sign up for a practice trading account and mock-trade to see how good you are. The http://www.howthemarketworks.com is in my opinion a good place to do this. Give it a shoot and see how good or ready you are without risking consequences and loosing real money.
If you are serious about investing and want to be able to follow the markets more closely, there are several other resources you may want to bookmark.
Yahoo Finance – http://finance.yahoo.com is one of my long time favorites.Not only can you read a valuable information on market trends and news bt you can conduct an in detail analysis of stocks, currency to currency compare and much more.
I used to visit Yahoo finance quite often, however I just discovered recently that Google too has started offering financial data and analysis at their web site: http://www.finance.google.com. It may be just me but I think that Google is more comprehensive and has more stratified layout, however both Yahoo and Google work best when you compare information from both sources.
If you are getting even more serious about researching stock and want to get involved to a next level, investing into a good technical stock and market analysis software is strongly recommended. My preference and tool of choice is MetaStock (http://www.metastock.ca).
MetaStock has two versions, the Pro and End of the Day. While Pro version is more suitable for people who constantly watch the market and need up to th minute market information, the End of The Day is more suitable for traders who are semi active and who compare and analyze stocks at the end of the trading day.
If you cannot afford to go with the commercial version of the software but still want to learn and explore the art of technical analysis the Best-Charts has a free version of their commerical version of the software. Although not as polished as MetaStock, it still does a nice job in providing some rudimentary technical stock analysis. The software can be downloaded from the company’s web site: http://www.stock-anal.com
Some other sites worth mentioning and visiting are PeterLeads – http://www.pennystocks.com for my Penny Stock Analysis. The Mootley Fool is another nice site for research and information – http://www.fool.com
Other tools and sources in my arsenal is Super Stock Picker http://www.superstockpicker.com. I am signed for their e-mail and am receiving free almost every day the recommended buy and sell tips that are fairly accurate in my estimate. So far they had been fairly useful in their research and combined with other free and few commercial tools I had mentioned earlier, they can be of great help to amateur as well as semi-professional trader.
Furthermore, they offer much more on their web site including different hand-picked portfolios of stock groups, grouped by their aggressiveness, growth outcome, risk factors etc. Also, they have a very nice selection of other resources including the investment forums, charts, etc. Definitely worth visiting if you are looking to get more from them than just free stock picks by e-mail.
Now one may be wondering where to start. Active Traders, End of the Day, Large Cap, Penny Stock, Mutual Funds, Currency, Commodity as well as unconventional options such as Real Estate.
Real Estate as Investment
Although a bit off-topic I decided to include a few lines about Real Estate investing from my personal experience. And before I talk a bit about each of above, here is a small tid-bit I decided to include on the topic of Real Estate as a lucrative investment opportunity.
I struck real gold on this one buying my first real estate property 12 years ago with borrowed $1000.00 deposit. I bought the place in Edmonton, Canada and paid $64.5K, resold it in 2004 for 109.5K invested profits into a larger and newer house, paid $211K for it, the market really went crazy after with 50% gain per year so my investment now is worth around $650 -700K with improvements I had done. With about 75K left owing to my mortgage I am net worth about $575K-$625K just from playing my cards right and entering the market at the right time.
But again, you must not just go out there and buy first property out there. Recent real estate crash in USA has taught even big banks a very expensive lesson when it comes to buying real estate to quick and to fast and not doing your homework properly to minimize your chances of setting yourself up for a very expensive mistake.
However if you do your research right and invest properly, real estate investment can be very safe to keeping money in the bank while providing higher rate of return than traditional bank deposits. But there are also risks involved, so be sure if you decide to get your feet wet, you know what you are doing.
If you want to learn more about Real Estate buying as either investor or a for a place to live, please feel free to read my article I wrote on the topic. The article is available from the following link: http://www.helium.com/tm/752349/introductionbuying-likely-larger-investments
Stocks- Large Cap Versus Penny Stocks
Penny stocks are another high yield area where one can earn 25%+ return per day, however because penny stocks are very volatile and therefore one of most dangerous areas to invest (you could also suffer 50% or greater daily loss of investment if you do not watch it closely and safeguard yourself further. Therefore I usually do not recommend this unless you absolutely know what you are doing.
Large cap stocks are safer however still subject to a degree of volatility. Furthermore because of the large price of a single stock option, to effectively trade large caps you are supposed to have a rather large amount to invest and dedicate to trading on ongoing basis.
However if you like the safety net of trading large socks but want to start small, the ShareBuilder http://www.sharebuilder.com may be an option to consider. ShareBuilder in general allows you to buy a fraction of the single stock therefore allowing you to budget while keeping your investment smaller.
Other trading options include Forex, which in essence means buying and selling currency (speculating against certain currency pairs, etc.). Just recently the Canadian Dollar has gained over 25% strength over US currency so if someone was smart to convert their money in CAD $ and sell it now, one would be about 25% wealthier.
However the Forex traders in general focus on short term fluctuations and trade actively all day long. A good forex trader can make about 5% profit per day on their investment but also loose much more than that in matters of hours.
There are many places where you can try your Forex trading skills before opening a real account. I recommend starting with a free practice trading account first just to see how good you are and how comfortable currency trading would be for you.
FXTSP http://www.fxtsp.com/ is a nice site I like to visit. They offer as low as 2 PIP (a PIP is spread between buy and sell price of the currency. So, if you buy a currency at let’s say $1.00 per currency unit the 2 PIP spread would mean that the currency would have to jump to $1.02 for you to break even.). See it for yourself.
This leads to a next topic of how the trading is done. Some trading places will allow you to “short trade” meaning you can spread more than what your net cash flow is, however the bank always has the right to “call the short” meaning that you have to repay the loan and sell the stock to cover transaction even if you are at loss. So be careful by taking the “short trading option” lightly. It is a great tool when used correctly but a dangerous trap for one who does not know enough about it.
This practice is called Margin Trading. Rather than writing in detail how it works, including the pros and cons of it, I will recommend visiting US Securities and Exchange web site where you can read about this and many other topics. The link to the article is: http://www.sec.gov/investor/pubs/margin.htm
Trading Scams Exposed
So, as you can see, there is much to know and much to learn if one wishes to be successful trader so my final recommendation is do not try to conquer it all. Instead pick one core area of trading and investment and focus on it. With discipline, research, caution and common sense the savvy trader always outperforms the bank in the rate of the return to their investment.
At this point I want to also give you few additional words of caution about some bad things floating around the Internet when it comes to investing. I covered those items in a more detailed description alongside with some other dangerous scams and schemes that you should avoid by all means.
Mysterious e-mails offering you free stock tips forewarning you about a big returns and jump in stock prices. Do not fall for those.
The following is an excerpt from the different article I wrote – Uncovering Internet Scams. The part quoted here deals with the Penny Stocks Scams, how they operate, where does the scammer earn his share of money and how you could loose the money.
The complete article is available from: http://www.helium.com/tm/266960/sounds-probably-truei-security.
Penny Stocks Scams.
We all got e-mails claiming stock XYZ will jump through the roof. The company XYZ is a reputable company in no way associated or affiliated with the scammer. So how the scammer profit? He or she purchases X number of stocks from company XYZ. He than floods unsuspecting users with millions of e-mails claiming the XYZ stock will jump through the roof. Depending on sophistication of the scam, the scammer will either wait out for people to fall to his trap and start purchasing the XYZ stocks because there is no way company XYZ would be associated with the scammer and therefore scammers having nothing to gain from lying the news must me true. More sophisticated and powerful scammer may even jump start the process by further purchasing more stocks of company XYZ.
The law of supply and demand in stock trading states that when demand rises the price of stocks will jump. Through fraudulent e-mails the scammer is creating the demand for stock as people will buy it especially if they see that price is rising. However this artificially produced demand will not last and the stock will eventually plunge back to where it was before the scam and where the true value of the stock is. By that time the scammer has offloaded his stock at artificially high price, therefore he/she wins while many that bought the stock when it was artificially elevated high through scammer’s activity, will loose money.
A New Twist on Penny Stock Scams
I had recently run into another variation of this same scam but with the twist. Several web sites offer this and in general more people fall for it as the advertising is done via what it looks like a legit web sites where you the reader come instead of scamer soliciting you. There are many variations I run on this same trap but in essence they follow the same story.
The author/authors of this Pump and Dump (inflate the price of stock and sell it before it collapses) start off with a nice story of a commercial stock picking program that is able to produce huge (400%) return rate and accuracy in picking right stocks at right time. They claim that you can buy the software license for some huge amount that even most naive person will not go for (I have seen anything fro $10 000.00 USD to $100 000.00 USD).Or as an alternative you can join their mailing list for a small fee (typically around $50.00 – $100.00 USD) and receive a new stock tip every week in the e-mail (every Sunday).
Using the earlier explained scheme where if enough interest is created and enough buying volume is generated, the price of stock will go up. So, if you manage to create a huge affiliate network of web sites that sell subscription to supposed $30K software, it does not really mean what stock you pick, it will go up in price. The scammer profits by buying the stock in advance, than sending the mass e-mail blast to his/her subscribers who at least in part act on his tip and buy the stock themselves. Furthermore, those subscribers are going to fan out the pick to their blogs, on-line forums, their e-mail lists etc. The scammer will typically exit out early while stock is at the peak using the third party technical analysis software to warn them when the price of their “magic pick” reaches peak and starts turning down, thus racking the huge profits (400% are not uncommon). Few lucky ones who get on the tip early and walk out early while price is still inflated high, will profit too, but majority of those who are unlucky to buy in when the stock is priced to high and wait until the stock tumbles down, will loose their money.
However, you will not hear about those as no scammer or affiliate of the scammer will not post the testimonial of those people. But you will find a testimonial of few who are lucky and unwillingly help spammer create additional legitimacy of their scam program. Even worse, so many of those testimonials are not even writen by real people but by the scamer himself or by the few people who will put their name and endorsement to everything and anything for a few dollars.
There are several variations of the above Scam by Subscription scheme. Stay away from all of them or risk getting burned. Your choice.
I hope you enjoyed this article and had learned few things about trading, the glamor of it (huge profits it can generate) but also dangers and traps you can fall in if you go into it without doing a right thing first and researching all sides of the opportunity.
Also, please feel free to look at my other articles I wrote recently.