Investing

 

Investing is a style of trading when the positions are held for a very long time from several weeks up to months or even years. A very little time is spent on trading analysis and position monitoring so an investor may be busy with his other life priorities. The main idea behind the investment approach is to put the money to work and make even more money that has been invested with less time and skills resources required to succeed.

It is a known fact that in countries like the USA up to 80% of people are investing their money and it leads to a really strong source of income after some period of time. The most famous investor is Warren Buffet that has started his career from 10,000 USD and now is a world-wide known multi-billionaire.

Assets for investing

After choosing investment as a trading style, the next step is to select the assets or at least the asset classes to invest in. There are more or less suitable instruments that can statistically higher chances to generate higher income than others.

Stocks. The most popular and well-known asset type that is used by millions of people. A higher chance of success in stock investing exists because it is a famous fact that stocks tend to grow most of the time rather than to fall down. There are many investment firms and pension funds that are allowed to open only long positions (buy) which leads to price growth. In our broker’s reviews, one of the aspects that are analyzed is the asset types offered for trading, and brokers like eToro or Forex.com have 12,000 and 4,500 instruments respectively, the biggest part of which are stocks.

Indices. The asset class represents a stock group that makes up the index. It is computed from the prices of selected stocks by a certain measure. For example, the most famous S&P500 index consists of the 500 largest by capitalization stocks in the USA. Almost all the brokers have such indices like NASDAQ, FTSE, CAC40, Dow Jones, Nikkei, and others so it is possible to invest in indices of various countries.

Commodities. Among this type of asset, there are well-known instruments like Gold, Silver, Wheat, Copper, and others. During high volatility periods like a crisis, war, pandemics like COVID-19 or a similar one, assets like Gold and Silver are treated as a so-called ‘safe-haven’ and investors tend to buy them to eliminate the risks. Instruments like Wheat, Sugar, Copper, Cotton, and others have seasonality factors that last for several months and are also popular for investments.

Forex currencies. A bit less popular for investing though still suitable for it because of swap rates and higher leverage available. There exist tens of trading pairs that allow generating a certain income out of holding positions for a long period of time. For example, after the huge drop in January 2015 on the EUR/CHF pair the investors that opened buy positions and held it at least for a couple of months could have made 10% even without using leverage.

Cryptocurrencies. A certainly new but already popular assets type that allows generating huge incomes. Many people have become millionaires because they have invested in cryptocurrencies at the proper time and fixed their profits in a suitable period. High volatility and lower capitalization in comparison to other asset classes make it a bit riskier but at the same time more profitable and by the end of 2020 there have already been many big funds, banks, and other financial institutions that have publicly revealed that they have some of their assets invested in Bitcoin and other cryptocurrencies.

Choosing a proper broker

When a trader decided to invest, a broker should be chosen with a very smart and comprehensive approach. Before placing money with someone, a must thing to do is to have a look at our brokers reviews where are located complex and full overviews of the brokers. Here are the key aspects that are put under analysis in the reviews:

  • Regulation– It is obligatory for a broker to be regulated. A licensed broker is obliged by law and entity that has provided him a license to protect the financial interests of every single client and not to act against a trader.
  • Trading fees – This point is usually not taken into account which is fairly a mistake because swaps, being a part of trading costs, may turn a profitable position into a losing one, especially when leverage is used.
  • Trading Platforms – Even if less time is spent in front of the monitor during investing in comparison to day trading or scalping, but still a broker has to have several trading platforms to offer to traders. They should have a certain level of usability, have built-in indicators and tools, have a modern design and other features.
  • Markets and Instruments – As mentioned above, the trader might want to invest in several asset classes that is why it is obligatory for a broker to offer as many instruments as possible. Forex pairs, CFD stocks, and indices, commodities and energies, metals, and cryptocurrencies must be in the list.
  • Support – From time to time, there might occur questions that could be resolved only with the help of the broker that is why it is important to analyze the responsiveness, variety of contact methods, and other factors that allow granting support service a high rating.

Investment Strategies

Everyone who has decided to choose investing as a style of trading must define a strategy to stick to. So here are some strategy examples that could be used.

1. Buy-and-hold

This strategy is the most well-known and popular among investors because of its simplicity and potential gains. When buy and hold applied, it implies holding of the positions for months and even years despite the potential price fluctuations.

A very nice example of a buy-and-hold approach that shows all its benefits is the purchase of Apple company stocks. If an investor would have bought just 100 shares at the beginning of 2008 and held it until January 2020, the stock would have allowed getting a return of almost 1000% in just over 10 years. In our brokers reviews there are companies like eToro, Roboforex, and others that allow to trade stocks CFDs and to benefit from its price movements.

The famous investor Warren Buffet even said that he has instructed the trustee in charge of his estate to invest 90 percent of his money into the S&P 500 index for his wife after his death. It proofs the robustness of this method and could be chosen as a fairly good investment approach.

2. Swaps

This strategy is applied mainly for currency pairs with big difference in interest rates. For example, currency pairs like USD/TRY, USD/ZAR, or USD/RUB have USD base currency with an interest rate equal to 0.25% while TRY, ZAR, and RUB have interest rates from 4% and above.

All brokers have different swap rates so a trader must overview them in the trading terminal of the broker. The instruments with the highest swap rates should be chosen as the ones that are worth investing in. It is a hard task to be done manually that is why a Swap indicator is a very good solution to automate it. With its help, it is much easier to see the symbols with the best conditions to generate profits from the long-term hold of positions and taking swaps.

swap indicator

3. Dividend investing

Dividend investing is a strategy of purchasing stocks that constantly pay dividends in order to receive a likely regular income from investments. Dividend investing gives traders two sources of profit: the first one is the predictable income from regular dividend payments, and the second one is capital appreciation over time. It is fairly a great approach for investors to generate income from dividends and build wealth simply by reinvesting received dividend payments.

The companies that are constantly paying dividends are called dividend aristocrats and have a long track record of paid and constantly growing dividends. It should be noted that not only stocks but indices as well as imply dividends payments because they consist of stocks. That is why indices CFDs of the majority of brokers like IC Markets and OANDA also have dividends payouts too.

4. Buy the dip

It is a known fact that all the assets can not move in one direction forever and therefore have drawdown periods. There is a famous proverb of Warren Buffett that has always said: “Buy the Fear, Sell The Greed”. It means that overheated assets should be rather sold and that when everyone is selling everything during a period of high volatility, then it is a good entry point.

Below is a good example of how the ‘buy the dip’ strategy could work. There are shown the yearly returns and drops of the S&P 500 index. It’s easy to spot that the average maximum drawdowns have been equal to -7% that could be very nice entry points.

sp500 market declines

Investing tips

Choosing an investment strategy is not enough and there are also some hints that could help to succeed in investing and not to lose.

Diversification

Such a famous fact but underestimated by the majority of traders. Diversification is usually described as a technique that allows reducing the risk by allocating funds among various and independent financial assets, industries, and other categories. The main goal of diversification is to maximize the returns by investing in different asset classes that would each react in a different way to the same happened event or world economy state.

Limit the leverage

Leverage is a double-edged sword and increases both potential profits and losses. It can either work for you or against you also. For example, if you make a trade with a full trading lot of 100k on a currency pair, each pip would be worth around $100. While it is really nice to think about the potential money that could be earned, but the money that has the same potential of being lost is rarely taken into account.

Leverage can be a very dangerous tool in the hands of inexperienced traders if used improperly. The majority of brokers do offer heavy leverage up to 500:1, though that does not oblige you to use it fully and all the time. Smart traders often use less than 5 times leverage and it saves their capital at risk. While the possible gains are getting smaller with this approach, but so are the possible drawdowns also.

Be constant

As mentioned above, there is no asset that goes in one direction constantly. There are always periods of growth and drops that change to each other from time to time.

When an investor faces a drawdown there is no need to start thinking about changing a strategy and start messing up with different trading approaches and entries without reason. Investing is a long-term activity and certain periods when the balance curve might go down are not a rare case. So every investor should be ready to face such situations and be ready to stick to the trading plan.

Investing overview

Investing could be considered as a less time-consuming approach in comparison to day trading, swing trading, and especially scalping. It really allows spending more time for earning money with a labor activity and invest earned money on a regular job.

There are many investing strategies a part of which are mentioned above so every trader can choose the one that suits most to his personality and financial goals. The choice must be made wisely because the potential profits and drawdowns depend on it a lot.

There are a lot of examples of constant investments that lead to very decent profits and might become a life-changer and create a really big source of income in some period of time.

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