Making Investment Decisions as an Amateur

Nowadays, online trading is about as prolific as online dating, social media interaction, and web surfing. Anyone can trade financial assets at the click of a button, with little or no experience required. Online trading platforms are a dime a dozen, and many of them are unregulated. However, before you dabble in the financial markets it’s important to get your bearings. How much money is available to you in the form of personal disposable income? In other words, once all your monthly bills, debts and obligations have been taking care of, how much is left?

Of course, it’s difficult to get a figure off the top of your head, since a budget is required to assess such data. If the money coming in every month is greater than the money going out every month, you have a budget surplus. If the money coming in every month is less than the money going out every month, you have a budget deficit. This is your starting point for all investment decisions. Fortunately, as an investor you don’t need to check your credit , if you’re using money that you already have available to you. It is not wise to borrow money for investment purposes, and that’s why things like margin trading and leverage are ill-advised for amateur investors.

Is There a Difference between Speculating and Investing?

Indeed, there is. Speculating is simply the act of placing money on a financial asset in the hope that it appreciates or depreciates at some future point in time. This may or may not come to fruition. However, the general term speculation is not always based on the long-term fundamentals of an asset. We know for example that the oil price will invariably rise in the future, but that does not stop speculators from shorting the commodity to make quick profits.

If multiple firms take a bearish position on a financial asset, the domino effect kicks in and markets react in a similar fashion. They hope to cash out before the price drops too far and they’ve lost all their money. This speculative effect is what drives markets more so than decisions based on sound economic principles. Speculation is rampant in currency trading, gold trading and real estate. However, it is imperative that speculative ‘investment’ activities are balanced with conservative investment strategy.

Is Investment a High-Yield Activity?

An investment is something entirely different. There are no short-term gains when you make an investment decision. The term itself is reflective of a long-term commitment to a financial asset or class of assets. You hope to achieve a profitable outcome over time as the asset appreciates. The direction of price movement must be positive for profits to result. Exchange traded funds are a popular form of investment which include multiple company stocks in one fund. These ETFs are a lot safer than investing in individual stocks where the all or nothing approach can make or break you. ETFs have proven to be one of the most popular forms of investment in the world. As an investor, you’re not hoping to make a killing on your ETF, stock or commodity – you’re hoping for average or above average returns over a long period of time. Of course, Futures markets are available and you can ‘hedge’ your bets on losses or gains at some fixed date in the future. Futures markets include the NYMEX or COMEX.

Investments can also be less volatile than speculative trades. You will not see the type of price activity when you invest as you would see in speculative price movements. That’s because speculation uses leverage to magnify your profits or losses. With investments, you are limited to your nominal investment – no leverage or margin trading. However, investment can also be extremely risky especially with new companies. You want to be sure that you’ve done the requisite homework before investing in clean energy, alternative energy, pharmaceutical startups, biotechnology companies and the like. At the end of the day, profits stand to be made in speculative trades and investment decisions alike. The goal is to have as much knowledge as possible before you part with your money.