People have this general misconception that investing is super complicated. Trading stocks, buying commodities, currency FX exchange may sound like a little bit over your head. In this article, I would like to try to dissolve this misconception by explaining it step-by-step through this simple three short questions what, where and when.
First of all, investing is putting your money into assets which can be financial such as stocks, bonds, commodities, options, etc. or physical like property. By putting your money into these assets you expect them to grow exponentially at a certain rate – the interest rate or rate of return. There is a trade-off between you spending the money now to buy yourself something nice and letting your money grow and spend them in the future for something bigger. Many times you hear about investing you will also hear trading alongside it. Both notions can be considered the exact same activity with one main difference, time. Investing would be considered for a holding period of more than 6 months of your assets before you sell them. Trading, on the other hand, would be with a holding period of fewer than 3 months before you sell your assets. The period between 6-3 months, that’s the grey area, though everything boils down to basically buy/sell at different points in time. The holding time period reflects your risk profile as well as your trading style. Below is a table with example assets you can invest/trade in:
|US Equities||Treasury Bonds||Metals||Commercial||Dollars|
|EU Equities||Corporate Bonds||Energy||Residential||Pounds|
|Small Caps||Foreign Bonds||Livestock||Land||Euro|
Now you know what is investing and what you can invest in. The second question that comes to mind is where do you actually go buy these assets? Property and any other real estate are usually bought through an agent or an online marketplace. Transactions are also done person-to-person where deals still need to be sealed legally. In terms of financial assets, there are traded through brokers. These brokers differentiate in terms of what assets they offer, their fees and prices, the platforms and customer service they provide. Many of the big banks have their own in-house brokerage service while there also large international brokerage corporations. In this digital age has never been easier to acquire financial assets. Through online brokers, the only thing you need to buy stocks, commodities, etc. is an account, your ID and a credit card.
Investing is all about information. Knowing when to enter a trade/investment and when to exit. The main source of income coming out from the investing world is the profit from your investment. In other words the difference between the price of buying an asset and the price of selling an asset. There is also the income from rent in property, coupon payments in bonds or dividends in stocks, though these are only a fraction compared to capital appreciation. Information is the main driving force which can be can be analyzed under fundamental/qualitative, quantitative or technical indicators in the decision-making process. Trading ideas should come from your observations of the markets and the different analyses should be used to support your idea and convert it into an investment/trade. You get ideas from observing the world economy and news seeking factors and events that affect the interconnected assets.
- Fundamental Indicators or Qualitative indicators. Fundamental analysis is the process of looking at a business at the basic or fundamental financial level. This type of analysis examines key ratios of a business to determine its financial health and gives you an idea whether the business is undervalued or overvalued. Finding out if the asset is overpriced and underpriced compared to what the market values it at can give you an edge and present you with a great opportunity to invest. Key indicators that are used in this analysis are earnings or profits and sales.
- Quantitative analysis is the process of performing mathematical and statistical analysis of the price of the financial assets to find out where the price is going to go in the future. Basically investing based on science rather than a human judgement on certain criteria and facts. In quantitative analysis tools such as regressions, Monte Carlo simulations, and other financial models help arrive at conclusions on the investment process.
- Technical Indicators would deal with Technical Analysis and Charting. The study of charts and the price action of the assets. In the technical analysis process, it is assumed that the historical market price data reflects all the relevant information about the asset. Through the charting of support and resistance levels and the identification of patterns, conclusions can be made on whether the price of an asset is going.
Don’t Confuse Technical analysis with a tool to generate trading ideas. A combination of these analyses should be used in the decision-making process. These types of analyses can be applied to a different extent to the different asset classes where the different classes have different specific indicators that affect them more than others. The usual workflow should be your idea first then looking at fundamentals with your qualitative analysis, confirm your idea with technicals and/or quantitative analysis. On that basis build your entry/exit and risk management strategy.
You should avoid investing/trading for income. You should rather seek to exponentially grow your account through your lifetime. Fixed salaried jobs, freelancing, writing, businesses, etc. should be the one providing you with income to cover your expenses and pay your bills. At the end of the day, everything boils down to entering a trade/investment and getting out/exiting. The difference between the price you bought it and the price you sold it is your profit/capital gain. In addition, investments in stocks have dividends which pay out at regular/irregular intervals or bonds which pay on fixed dates.
In this article we have quickly learned what investing is, where can you invest and when. Money is just money. A tool, a means to an end and investing is the ultimate method to make your money grow. Money should be respected and you shouldn’t get consumed by it. Keep in mind that you cannot force the market to trade its products at particular time frames. Rather the market gives you clues and opportunities to transact in securities depending on the time period.
Don’t risk what you cannot afford to lose.