Learning to Recognize Investment Risks

By Sara Ferguson

As an investor you face many risks, the most obvious is financial risk. Companies go bankrupt, trading decisions go bad, the best laid plans go awry, and you can end up losing your money " all or some of it, whether the economy is strong or weak. What puts your finances at risk? Here are some types of risks below.

Interest rate risk: Interest rates, set by banks and influenced by the Federal Reserve, change on a regular basis. When the Fed raises or lowers interest rates, banks raise or lower interest rates accordingly. Interest rate changes affect consumers, businesses, and, of course, investors. Whether rising or falling interest rates are good or bad depends on the type of investment.

Market risk: No matter how modern our society and economic system, you cant escape the laws of supply and demand. When masses of people want to buy a particular stock, it becomes in demand, and its value rises. That value rises higher if the supply is limited. Conversely, if no ones interested in buying a stock, its value falls. This is the nature of market risk. The value of your stock can rise and fall on a whim of market demand. Your investments are impacted on that demand or mood of the market.

Inflation risk: Inflation is the growth of the money supply without a commensurate increase in the supply of goods and services. For consumers, inflation shows up in the form of higher prices for goods and services. Inflation risk frequently is also referred to as purchasing power risk because your money doesnt buy as much as it used to.

Tax risk: Taxes dont affect your investments directly, but they do affect how much of your money you get to keep. To help minimize tax risk, be aware of the tax implications and obligations associated with the different types of investments. Because the tax rules are often very complex, differ for different investment vehicles and scenarios, and change regularly, talk to your accountant, tax advisor, or tax attorney for guidance.

Political and governmental risks: If investment vehicles were fish, politics and government policies (such as taxes, laws, and regulations) would be the pond. In the same way that fish die in a toxic or polluted pond, politics and government policies greatly influence the financial stability of companies and commodities, the value of currencies and so forth.

Emotional risk: Emotions are important risk considerations because the main decision-makers are human beings. Logic and discipline are critical factors in investment success, but even the best investor can let emotions take over the reins of money management and create loss. For any kind of investing, the main emotions that can sidetrack you are fear and greed. - 23222

About the Author:

How to Invest Today is dedicated in teaching and keeping you up to date on the information you need to invest. Investing is a always changing world with constant pitfalls. How to Invest Today trys to help you around them to avoid getting stuck and keep you informed of the latest information.

How Ordinary People Beat the Wall Street?

By Hass67

You must have heard this fact many times that more than 90% of new traders fail and give up in a few months. Only a few survive in the long run.

Yet, everyday millions of ordinary people around the world wake up, turn on their computers and try to make a living trading the financial markets electronically. Do you want to be like them?

The interesting thing is this that almost the same statistic of failure exists in other businesses. Take the example of restaurant business. New restaurants open everyday; most of them fail. Only a few are able to succeed.

Still the possibility of hitting big never deters people from starting new businesses. The same applies to forex trading.

Kathy Lien is a professional forex trader. She is a great writer too and has written many books on forex trading. In one of her books, Millionaire Traders, she tells the story of 12 ordinary people who beat the Wall Street at its own games.

The rag to riches story of Hoosain Harneker is remarkable. He had lost almost all his saving in a failed business venture.

After that he had no money. He was heavily in debt and did not want to borrow more. His best friend told him to trade forex. His friend emailed him the forex trading system that he used to make pips daily. The forex trading system was based on simple moving averages. Hoosain did not have even a few hundred dollars at this stage and did not want to borrow from his friend.

Hoosain took six months to save $1000 to open an account so that he could trade forex. But during those six months, he practiced and practiced the forex system on the demo account.

His wife was not sure about his success. He promised his wife that he would never trade forex again if he blew up the $1000. All the 12 people in the Millionaire Traders had blown their accounts in the first few months of trading except Hoosain.

His advice to new forex traders: Start by practicing on your demo accounts and double your amount three times in a row. Only then think of trading with your real money. Paper trading will give you the confidence to start trading live.

Now many new traders jump straight into live trading without practicing on their demo accounts. They make consecutive losses. Consider forex trading to be difficult and give up.

Forex trading requires a lot of discipline. Learn from these 12 ordinary but remarkable people who had the discipline and determination to make it big. - 23222

About the Author:

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Read about Trend Forex System. Try Netpicks Forex Signal Service.

Planning for Your Future: an Age-centric Tip

By Billy Pace

Before designing any investment strategy it is highly recommended that you consult an expert in the field. This guide is aimed at helping you to best invest your money for retirement at every stage through life.

You've heard the news, that we are about to enter a recession. Jobs may be lost, and belts will need to be tightened. During times like this, many people lose sight of the need for long-term financial plans. It is times like these, though that should heighten our awareness for the need to have sound financial goals and know how to achieve them.

Unfortunately, we can no longer depend upon Social Security to carry us through our golden years. More and more, governments are pushing the onus of caring for themselves through old age back onto the people. This burden opens opportunities for the savvy consumer though. Through smart investing and discipline you can lead a life of luxury instead of merely surviving your old age.

It is more important to begin investing small amounts of money right away, then to try and save up a large amount. Remember that most retirement plans are built on compounding the interest, so the longer your money is in play, the more interest you will earn.

You can read the whole article to see all of the options available to you, or you can skip to the section that deals directly with your stage of life.

20s: Discipline early in life, will serve you throughout life. Do not allow yourself to become buried under debt. Yours is the least painful position to be in. Your best course of action will be to pay down debt and make use of employer contributions to a 401k fund. You should also look into an IRA - your back can help you to set it up so that funds are automatically withdrawn so that you don't miss your money.

You are 30something: You are beginning to reap the rewards of your hard work with higher wages. Add to your 401k and IRA accounts gradually, slowly increasing contributions. Experts say that you should be investing about 10% of earnings by this point in life. Take the remainder of that 10% and invest in stocks. Stocks come with inherent risks, but prudence can help minimize risks.

You are 40something: Now is the time to become more aggressive with your savings. Ensure that you are filling your annual 401k and IRA allowances. You also want to shift non-liquid assets around. Remember to not place all of your eggs in any one basket. Begin to move stock investments into the bonds market for a greater level of security.

50s: It is time to look hard at your finances. What goals do you have, and how much money will meeting them require? Arrange to meet with a financial consultant who can help you to design a custom plan to assist you in meeting your goals. Find out if you qualify for any assistance and apply for all that you are entitled to. Hit your limits - contribute the maximum you are allowed. Understand that 65 doesn't mean you won't work again. Many people are choosing to stay in their jobs longer, or to take part-time positions elsewhere. - 23222

About the Author:

During uncertain or tough times one personal finances step you can take is getting your financial house in order. Any credit card debts should be dealt with.

Kick Start Your Forex Trading

By John Eather

The foreign exchange market provides many rewards to investors who know how to use the system. The goal of this article is to get you started with Forex basics so that you can take advantage of this incredible market.

In days gone by, foreign exchange trading was limited to national banks and large corporations. All of this changed in the 1980s when the rules were modified to allow investors of modest means to join in by using margin accounts. Margin accounts are what have made Forex trading so popular. With a 200:1 margin account, you are able to control $200,000 with an investment of only $1,000.

Forex can be challenging, so it's important to gain the knowledge you need in order to make good investment decisions. While it's easy to get started in Forex trading, it does carry some risks. As a beginner, you need to learn as much as possible about the Forex market before beginning to trade.

Forex traders typically require a broker to manage transactions. Almost all brokers are respectable members of large financial institutions. A reputable broker will be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) for protection against fraud and predatory trading practices.

Starting a Forex account is as uncomplicated as filling out a form and supplying the mandatory ID. This form should include a margin agreement that says that the broker has the right to iclose any trade that looks too high-risk. This is intentional to protect the broker's interests, as most trades are opened utilising the broker's finances. When your account has been recognised, you're ready to put money into it and get cracking with your trading.

Many brokers provide a number of different types of accounts to accommodate the needs of individual investors. Mini accounts let you get started in Forex trading with a little as a $50 investment. Standard accounts have minimum deposit requirements ranging from $1,000 to $2,500, depending on the broker. The amount of leverage available varies from one kind of account to another. High leverage accounts let you control greater sums of currency.

Trades are free of commission, allowing you to make multiple trades daily without having to pay lofty brokerage fees. Brokers make their money based on the "spread"; the difference between bid and ask prices.

Virgin traders are strongly advised to get some experience in Forex by executing "paper trades" for a time. Paper trades are fundamentally practice transactions that don't require real money. They allow for a way for you to determine how the Forex system acts whilst you discover how to use the large range of software tools at the service of virtually all Forex brokers. - 23222

About the Author:

Before you start online trading forex, make sure you check John Eather's brilliant free ecourse and reports on Forex Trading. Receive the latest info on the most cutting-edge trading robots and trading systems available on the market today. Go to MoneyMakingFxTrader.com to learn more.

Long Term Investing with Options

By Jordan Weir

Most traders view options as strictly a short term tool. The idea of a highly leveraged bet with the potential to make big bucks quickly appeals to the gambler inside all of us. Just like a card counting black-jack player, options strategies can be used to make significant short term gains, provided the trader is careful, and knows what they're doing. But while options are usually employed solely by that clique of high-risk, high-reward traders, they actually have enormous benefits that tend to go unnoticed by many a long term investor.

The strategy I'm about to unveil isnt often used. Amazingly, I've only briefly heard mention of them on obscure websites, and even then, not in enough detail to give an example. So here it is, what I believe may be the best kept secret from long term investors on main street. The stock option strategy for the long term investor.

The strategy is a vertical option spread, using leap options. How this technique works is you buy one option, while simultaneously selling another option for the same month, but at a different strike price. While XYZ is often my generic symbol, I will use a real company in this case. Keep in mind, this is NOT a recommendation. Indeed, it would probably be a bad idea to invest in the example I'm about to give. Its just an example. Yet to get realistic prices for this strategy, it may be helpful to use a real company.

note:I wrote this part of the article about a short time ago, prices may not be 100% current. So GE is currently at 10.41 per share. In this example, let us talk the January 2011 options, giving GE plenty of time to go the way we think it will. So if you thought GE was an excellent long term buy, it would be within reason to believe it's going to at least $20 per share by that point. By January 2011, many people expect the recession to be over, and that single development alone should lead to a substantially higher stock price.

Buy one option to start the vertical spread, and sell a second option at a higher price to complete it. With our price target of around $20, and given the current price, 10.41, I would buy the 12.50 strike call option, and sell the 17.50 strike call option. The 12.50 option can be bought for 2.71 at the moment, while the 17.50 can be sold for 1.40, giving us an total cost of 1.31 per share for the option spread.

Now lets examine this trade for a second. If General Electric is trading below 12.50 on the January 2011 expiration, both options expire worthless, and the 1.31 per option spread invested is gone. On the other hand, if General Electric is trading above 17.50, then the 12.50 option will be worth exactly $5.00 more then the 17.50 option, and so the position has a value of $5.00 per share. If its between 12.50 and 17.50, the call we sold expires worthless, while the call we bought will have value equal to the difference between the stock price and the strike price; 12.50 in this case. How do you break even? Well we paid 1.31 for the option spread, so if its exactly 1.31 higher then 12.50 (13.81), then well be at break even if the stock is at that point.

That gives us an amazing return of 281% if GE is above 17.50, for an annualized return of 107% (holding period is 22 months). Because of the high potential for risk - a complete loss of investment if GE is below 12.50 in Jan 2011, you shouldn't put more then you're willing to risk in the trade. Definitely a speculative play. Yet given how much time there is, it's a much surer bet then short term options, and significantly more profitable then just buying the shares.

So now that the basic idea is covered, what are some examples of vertical spreads I would consider? I am a strong believer in investing in emerging markets, so I'm long term bullish on EEM (IShares MSCI Emerging Markets Investment Index). The January 2011 25-30 vertical on EEM is only going for about $1.88 at the moment, with EEM trading at 25.30 so I think that would be a wise investment. Above 30 it would be worth $5 at expiration, while below 25 it would be worthless. Unless the economy further deteriorates, I can not imagine that occurring.

Along the same lines, I expect FXI (iShares FTSE/Xinhua China 25 Index) to go up. The "China miracle" isn't over, merely in a subdued state due to temporarily reduced demand. The 30-35 vertical Jan 11 vertical would be worth $5 at expiration if FXI is above 35, which from its current price of 28.51, is not much of a stretch. That vertical spread currently has a $2 price, so that would be an even 150% return from now until January 2011.

A significantly more controversial play would be Bank of America. While the trader in me screams to short the stock, I foresee it being far more valuable then it currently is a couple years from now. The simple reason is that yes; financial stocks have been hammered by the current collapse. Yes, some banking companies have went bankrupt, or have been on the verge of bankruptcy. Is the financial system going to completely collapse? No. Are out of control bank runs going to drive them out of business? No. Are banks going to be lending and making money again after this recession ends? YES! Is pent up demand in housing going to cause a rush to buy houses at prices not seen in a decade? YES! Are banks going to profit from this? Most DEFINITELY. If BAC is above $10 at the January 2011 expiration, the 7.50-10 vertical for Jan 2011 would be worth 2.50, while only costing about $0.65. That would give a 286% return, or 108% annualized. The risk of course, is that BAC goes bankrupt, or BAC flounders under the $7.50 per share mark past January 2011. In either case, you would lose your investment. Yet with prices as low as they are now, that isn't very likely.

For many people, the stock market is not the place to get rich quick. While some short term traders will have tremendous success with these option strategies, long term investors should use these same strategies while remaining focused on the longer term, to achieve gains vastly exceeding those of the regular stock market, while limiting risk. - 23222

About the Author:

Wanna hear more about this fantastic Stock Trading Strategy? Come to my website and find out all you need to know to become a stock market master. Find out what sectors to invest in and when, and learn the Stock options strategys the big players use to make money in the markets.