The adage goes something like ‘the best time to start investing is now.’ For some beginners, this can be painstaking, considering the volumes of information on the best investment with guaranteed returns. Other beginners will think this is an easy way to make a quick buck and plunge head first in the markets.
This post is for the amateur investor who is ready to make a strategic decision to safeguard their investment against exposure to unsustainable risk, but with enough latitude to pursue conservative opportunities that yield capital gains, and learn the ropes of the trade while at it.
Apart from the theoretical understanding of how the financial markets operate, it is imperative that a beginner gets a realistic feel of the different strategies investors employ in pursuit of opportunities in the markets.
The following is a detailed explanation of five best investment approaches suitable for beginners:
Exchange-traded funds (ETFs) offer a less rigorous opportunity for participating in the stock exchange. As a beginner, investing in ETF is ideal because an ETF pools together several assets including particular stocks, commodities and bonds, and the performance tracked against an index. ETFs allows you as the investor to trade several assets commonly as if they were a single stock. The diversification of the ETF enables beginners to access a broad portfolio of stocks and bonds providing the convenience and reduced risk. Consequently, the flexible nature of ETFs allows an investor to trade flexibly, with the choice of buying and selling at any time during regular trading hours.
- Mutual funds
Mutual funds are pooled investment vehicles ideal for beginners because of its two primary characteristics. First, a beginner is able to access the services of a professional trader in the name of fund manager despite the meek amount of capital, some as low as $25. Secondly, the investor is exposed to minimal risk because mutual funds, like ETFs, invest in a diverse asset class portfolio of stocks, commodities, and bonds across different markets and industries.
- Individual stock
After a detailed analysis of the past performance of an individual stock and the prevailing facts, individual stocks can offer a stable investment opportunity suitable for beginners. Caution should, however, be placed to ensure that the investment into the particular stock does not upset the risk tolerance level of your portfolio in case of a negative turn of events. Markets is not always predictable.
- Certificate of deposit
Depositing money in a bank over a specified term length with a fixed and guaranteed return of capital plus interest is a sound investment opportunity for a beginner. Certificate of deposits is insured and hence the capital plus interest are guaranteed to the investor at maturity. However, it is important to understand that access to this money is limited during the stipulated investment term length and may attract fees or loss of interest in case of withdrawal.
- High Yield Savings Account
This investment also entails saving for the sole purposes of earning capital gains from interest over a specified term length. However, unlike the certificate of deposit, the interest is not fixed and hence interest is according to the prevailing market rates. Funds in this account are however more liquid hence easily accessible.
Chris Bouchard is a strategic consultant who works with non-profit leaders and social entrepreneurs to apply concepts and techniques to identify complex strategic issues, find practical solutions, and devise strategies to create and win a unique strategic position. He also offers project development, proposal writing, and project evaluation services.
Figuring out what business venture to invest in can be a difficult process. When I was looking for a business to become a part of, I had a rough time trying to understand what to look for and what are some red flags. I have put together some metrics to help you determine whether or not a business is worth investing into.
What Are the Earnings?
Earnings are vital for a stock to be understood as a good investment. With the void of earnings, it is hard to evaluate what a business is worth. While current earnings have been overlooked during the boom of the internet stock, investors still were buying stocks in businesses that were thought to have earnings in the future. Earnings could be determined in this main three ways:
Earnings Growth is described as a percentage. This percentages are gathered from month to month, or quarter to quarter. The premise of earnings growth is that the present reported earnings should be higher than the previous earnings that were reported. I caution you however, some may argue that this is “backward-looking” and that future earnings are more critical. While the pattern of growth is one of the essential tools for a business, the relationship of the growth rate matters.
Quality of earnings factors favorably into evaluation of a company’s status. This process is left to a professional analyst, but the casual analyst could take a few steps to determine the condition of a company’s earnings.
For example, if a business is growing its earnings, but has revenues that are declining while costs are increasing, you can guarantee that this growth will not last the test of time.
What is the return on equity (ROE)?
on equity is the measurement of effectiveness of a brand’s management
to turn a profit on the money that its investors have entrusted with.
ROE is the purest form of evaluation and could be broken down even further. ROE could be compared to the general market and then to peer groups in industries. Obviously, if there are no earnings, the ROE would be negative. I strongly recommend that you do some research into the company’s historical ROE to evaluate its consistency.
While these three characteristics could lead to a sound investment in a good company, do not settle for them alone. Do your best to gather as many metrics to ensure that you are making the best decision possible.
If you look back over the past 25 years of stock market history you will find that it’s hard to beat the performance of the NASDAQ 100 stock index. The NASDAQ 100 is the 100 largest non-financial stocks that trade on the NASDAQ stock exchange. In general, it out performs the S&P 500 when the market is advancing and under performs the S&P 500 during periods of decline. Therefore, when the economy is improving many investors look for exposure to this index.
The most popular way to invest in the NASDAQ 100 is through the ETF which trades under the ticker symbol QQQ. This ETF is designed to track the performance of the NASDAQ 100 stock index less fees and expenses. It is one of the most popular ETFs trading about 50,000,000 shares per day.
In recent years another innovation in the ETF world has been the use of leverage. There is a 200% or 2x leveraged version that tracks the index and it trades under the ticker symbol QLD. The goal of this fund is to move up or down 2% (on a daily basis) for each 1% move in the NASDAQ 100 index (less fees and expenses).
For even more leverage ProShares also offers the 300% (3x) leveraged NASDAQ 100 ETF which trades under the ticker symbol TQQQ. These leveraged versions are popular with active traders but only trade a fraction of the volume of the QQQ.
The most leveraged way to gain exposure to the NASDAQ 100 is through the NASDAQ 100 stock index futures. The most popular version is the electronic E-Mini contract (ticker symbol NQ). This contract is valued at $20 times the index so if the NASDAQ 100 is at 2700 the total value of the contract is $54,000. Since the margin requirement to hold this contract is only $3500 at the current time, this give you 15 to 1 leverage which makes the leveraged ETFs look meek in comparison.
These leveraged products are designed for active traders and experienced professionals who monitor their positions closely. Long term investors are much better off in the QQQ which over time has out performed almost all other stock indexes. In fact, due to the fact that the NASDAQ 100 has a higher beta than the S&P 500 there is absolutely no reason why the average investor would want to add additional risk to their position.