Investing is a methodology of capital allocation that focuses on long-term strategies. Investing refers to holding specific securities (stocks, options, bonds, etc.) for a period of time that ranges from 1 year to 5 years. Often times investors hold position in their portfolio for longer periods (decades). Investing is often referred to as a buy-and-hold strategy. The target for the average investor is to receive financial returns and accumulate wealth overtime.
There's a large variety of equities that can be utilized to accomplish your investment goals, including (but not limited to) stocks, options, bonds, currencies, cryptos, futures, commodities, exchange-traded funds (ETFs), precious metals (gold, silver) and real estate. Investors pay little attention to market volatility and price fluctuations. In fact, investors see market pullbacks and market crashes as bargaining opportunities to buy the equities of their interest at cheaper prices. Time is on their side.
Key Insights
- Definition of Investing: Investing involves allocating capital with the expectation of profit over time. It encompasses various forms, from financial instruments like stocks and bonds to tangible assets like real estate and collectibles.
- Understanding Risk and Return: Return on investment is central to investing, but it comes with varying degrees of risk. Lower-risk investments like government bonds offer steadier returns, while higher-risk options such as stocks and cryptocurrencies can yield greater rewards.
- Types of Investments: Investors have a range of options, including stocks, bonds, mutual funds, and real estate. Each type offers unique features and potential returns, catering to different risk appetites and investment goals.
- Investing Styles: Different investing styles suit different preferences and objectives. Value investing focuses on undervalued assets, while growth investing targets companies with high growth potential. Active and passive investing approaches offer contrasting strategies for portfolio management.
Best Practices for Beginners: Starting your investing journey requires understanding your risk tolerance, developing a trading plan, and finding your comfort zone. Building discipline and continuously refining your strategies are essential for long-term success in trading and investing
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Index (Investing)
Definition of Investing
Understanding Investing
Types of Investing
Investing Styles
How To Invest
Examples of Return from Investing
Understanding Investing
Types of Investing
Investing Styles
How To Invest
Examples of Return from Investing
Definition of Investing
Investing refers to allocating capitals (money and/or resources) for a period of time with the expectation of receiving a profit in return. The goal of the investor is to generate income, profits or gains, at the end and/or during that period of time. Investing can be done in various forms, such as financial plans, purchasing company shares, real estate, as well as commercial ventures.
Investing refers to allocating capitals (money and/or resources) for a period of time with the expectation of receiving a profit in return. The goal of the investor is to generate income, profits or gains, at the end and/or during that period of time. Investing can be done in various forms, such as financial plans, purchasing company shares, real estate, as well as commercial ventures.
Understanding Investing
Return on investment, and the expectation of a positive return, is the cornerstone of investing. However, all investing carries a certain level of risk. Some investments are safer than others, while some are riskier than others. The lower the risk, the lower is the return on the investment. The higher the risk, the greater is the return on investment.
Return on investment, and the expectation of a positive return, is the cornerstone of investing. However, all investing carries a certain level of risk. Some investments are safer than others, while some are riskier than others. The lower the risk, the lower is the return on the investment. The higher the risk, the greater is the return on investment.
Low-risk investments includes certificate of deposit (CDs) and government bonds (Treasury Bonds, Treasure Notes and Treasury Bills). As we go up the ladder and increase the risks, the next in line are corporate bonds, mutual funds, fixed annuity, followed by preferred stocks, stocks that pay dividend, exchange-traded funds (ETFs). Stocks and growth stock specifically are the next investment instrument along the risk scale. Finally commodities, derivatives (futures and options) and to top it all, cryptos, are among the risker, and potential more profitable, investments.
Stepping outside the financial markets, investments can be made in properties, such as real estate, land, personal and commercial businesses, as well as tangible objects such as art, antiques and collectables.
The type of returns received depends on the type of asset(s) where the capital was invested in. Stock dividends are oftentimes paid quarterly. Bonds pay interests every six months. Other investments that don't pay dividends or interest, such as regular stocks, options, most ETFs..., produce returns in the form of price appreciation.
Having a variety of investment assets in one's portfolio can ensure risk diversification and generate different types of returns, from dividend and interests to capital appreciation and capital gains.
Types of Investing
The most common form of investments are financial vehicles, such as (but not limited to) stocks, bonds, mutual funds and options. These types of Investments allow individual investors and corporations to raise and deploy capital to companies and/or institutions, and then use that capital to grow their business and/or to generate profits. Let's take a look.
The most common form of investments are financial vehicles, such as (but not limited to) stocks, bonds, mutual funds and options. These types of Investments allow individual investors and corporations to raise and deploy capital to companies and/or institutions, and then use that capital to grow their business and/or to generate profits. Let's take a look.
Stocks
When purchasing stocks, investors buy a fraction of a company in the form of shares. Investors become part owners of that company. Company owners are referred to as shareholders. Shareholders participate in the company growth and success via dividend payments (if the company pays dividends) and price appreciation. Depending on the size of their investments and the type of asset owned (stock class A, B...) shareholders have also voting rights, which allow them to participate (through casting ballots) in selection of board managers and other non-managerial issues related to the company.
Options
Options (as well as other derivatives such as futures) are financial instruments that derive their value from the underlying securities, such as stocks and indices. Covered calls, calls spreads, put spreads and iron condors are some of the more popular options strategies. Option contracts give the buyer the opportunity, but not the obligation, to buy or sell (depending on the contract they own), the underlying security they derive from, at a fixed price, within a specific time period. Options, and other derivatives such as futures, utilize leverage, making them high-risk-high-reward type of investments.
Bonds
Bonds are debt obligations issued by governments, municipalities, and corporations. When purchasing bonds, the investor of the entity/institution's debt. In exchange the investor receives interests, generally every six months, and the return of the full value of the bond when it matures.
Bonds are debt obligations issued by governments, municipalities, and corporations. When purchasing bonds, the investor of the entity/institution's debt. In exchange the investor receives interests, generally every six months, and the return of the full value of the bond when it matures.
Funds
Both mutual funds and exchange-trades funds (ETFs), which are the most popular forms of investment funds, are pooled instruments managed by investment and money managers. Funds allow investors to invest in a basket of stocks, bonds, sectors-related and/or industries-related equities, and/or a combination of all-of-the-above instruments. Mutual funds and ETFs can be tracking indices, such as the S&P 500 or the Nasdaq 100, or be actively managed by fund managers.
Investing Styles
Value Investing
Value investing is an investment strategy that involves selecting companies that have lower Price per Earnings (P/E) and relatively high dividend yields, as well as companies whose price value is trading for less than their intrinsic or book value.
Growth Investing
Growth investing is an investment strategy that involves investing in growth companies, which are companies that typically have higher valuation ratios (example high P/E/) than value companies.
Active Investing
Active investing is an investment strategy that involves frequent trading typically with the goal of beating by actively managing the investment portfolio.
Passive Investing
Passive investing is an investment strategy that involves investing in index funds, such as the S&P 500, the Dow Jones, and/or the Nasdaq 100. The goal of passive investors is to try to replicate the returns from the broad market indices, while spreading risks broadly, across all sectors and industries represented by the securities held in the benchmark index or indices.
How To Invest
Self Managed or Self Direct Investing
Also known as do-it-yourself investing. Accounts managed by individual investors through online brokerages, availing them low commissions and the ease of executing trades on their own, directly from the brokerage platform. Self managed invest requires time, a level of trading education and trading skills to being able to place orders, locate appropriated entry level opportunities and, most importantly, being able to control one's emotions.
Professionally Managed
The largest majority of investors preferred professional money managers (wealth managers) handling their investment affairs. While more costly than the do-it-yourself method, professionally managed investing avail investors the sense of security that an expert or a team of professionals are performing the adequate research, making the correct investment decisions and looking after the investors' interests.
Automated
Also known as robo-advisors, this type of investing, powered by artificial intelligence (AI) and trading algorithms, gathers investment profile of the individual investor and make the necessary recommendations to meet their needs. Automated investing is a cost-effective type of investing aimed to reduce human errors, improve investment performance and increase returns.
Examples of Return from Investing
Let's say that you bought 1000 shares of XYZ stock for the price of $16. Seven (7) years later the price of XYZ stock had climbed to $44.
First of all, congrats! Now, let's calculate your percentage return on investment (without counting commissions and fees), using the formula below:
Net Return on the Investment / Cost of the Investment x 100
Net Return on Investment
$44 - $16 = $28 x 1000 = $28,000
Cost of the Investment
$16 x 1,000 = $16,000
(28,000 / 16,000) x 100 = 175%
Your investment in XYZ stock produced a total return of 175% in 7 years, translating in an average return of 25% per year (175 / 7 = 25)
Best Practices to Start your Trading and Investing Career
To conclude, let's look at some recommendations to put all this information into practice
Identify your Trading/Investing Style
- Are you comfortable holding positions overnight? If you are, day trading might not be for you. Instead, consider exploring swing trading, position trading and/or investing.
- Do you rather trade a few hours a day and then be done with it? If you are, day trading might be a more suitable style for you, compare to, let's say, swing trading, were monitoring daily activity is important.
- Do you have limited time and/or interest to monitor charts daily or even every other day? If so, investing might the appropriate style that better fits your needs and/or schedule.
Ask yourself those questions, and other similar ones. The answers will help guide you towards the trading style(s) that better suit your needs. Please keep in mind that there might be more than one style that we are attracted to or suitable for. For example, you might gravitate more towards swing trading, and also, occasionally enjoy day trading activities. Be flexible and keep checking with yourself.
Manage your Trading Emotions by Developing a Trading Plan (and Sticking to It)
Emotions can run while with trading and investing. When that happens, emotions can cloud our judgement that and decision-making process that negatively impact our trading experience, and potentially our lives as well. In order to control the emotions, we need to develop a trading plan that fits our needs.
Before entering any trade, precisely define the following parameters:
- Equity/Company to Trade and Invest (ex: Apple, AAPL)
- Strategy (ex: going long, buying)
- Style. How long are you going to hold this position (ex: swing trade, between 2 and 30 days)
- Position Size (ex: 100 shares of AAPL company)
- Entry (ex: ~$175)
- Use 1:3 risk/reward ratio, meaning risk $1 to make at least $3, to calculate targets and stops. The risk/reward ratio will help you decide whether or not, it's worth taking the risk to receive that potentially reward
- Targets. Have a least two targets based on upper resistance levels (R1: $200, R2: $220, R3: $240)
- Stop Losses. Use one or two stops losses based on lower support levels (S1: $170, S2: $165)
- Ask yourself the following questions, and use the answers to design your trading plan.
- What are you going to do if/when price reaches the first target? the second target? the third target?
- Exit partial position and raise the stops? Stay in the position? Exit the full position?
- What are you going to do if price moves against your prediction? Exit the full position? Exit a partial position?
- Wait for the stop loss to trigger? Add to the initial position?
After entering a trade, manage your position(s) and exit strategies accordingly, based on your trading plan. And most importantly stick to your plan!
Find your Comfort Zone
As you gain experience in trading and investing, work at finding your comfort zone. For example, use position sizes that don't keep you up at night; trade or invest in equities that give peace of mind; avoid trading or investing in equities that are too volatile or highly speculative. In other words, keep refining your styles and strategies to create the most comfortable trading environment that will help you thrive and succeed.
Build Trading Discipline
Create a safe trading environment. Learn the importance of discipline, what stocks are tradable and what stocks to avoid, when is the best time, and worst time, to trade and other valuable tips. To learn more, download your free guide below.
Create a safe trading environment. Learn the importance of discipline, what stocks are tradable and what stocks to avoid, when is the best time, and worst time, to trade and other valuable tips. To learn more, download your free guide below.