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Considerations Before You Invest

Jul 22nd, 2010 by TypesOfInvestment

If you are interested in investing, specifically with cash investments, before you do anything we hope this article will provide some much-needed insight. In most cases, getting involved with investment opportunities is an excellent option, one that when done right can produce a great return on investment but in some situations, it would be better to put an investment idea on hold until certain things could be resolved.

One of the challenges seen in today’s society is that some people are panicking and making rash investment decisions because of the world financial crisis experienced over the past two plus years. As a result, some of the decisions have led to choosing the wrong type of investment. With this, individuals actually lose money instead of make it. With any investment, especially a cash investment, it is imperative to have a plan or strategy in place prior to the investment being made.

Below are just a few of the more important decisions that you would need to make before you start making cash investments.

Financial Situation

For starters, you need to look at your current financial situation. By knowing the situation you are in now would help you set realistic goals of where you want to be in the future with the investment.

Risk Comfort Zone

Another consideration is to know your risk comfort zone. Every person who gets involved with cash investments has a certain comfort zone pertaining to the amount and level of risk willing to take. Typically, this zone is dictated by the amount of money a person has to lose. Keep in mind that the primary objective of investments is to make money but because there is always risk of losing it, only you can determine the level of loss of which you are most comfortable.

In addition, every type of investment has a distinctive risk. For instance, cash investments have little risk with the exception of inflation. Since you would make your money on interest paid on the investment, with interest for cash investments being linked to current market conditions this means that any market fluctuation could impact interest and ultimately, the investment.

Investment Types

You would also need to look at a variety of different investment types so you could determine the one that is going to be most beneficial to your situation. Considering that there are so many possibilities, you need to learn what you can about the different investment opportunities so you could focus on those that interest you most.

The three primary areas that you would research include cash investments, stocks, and bonds. Just as you need to know potential earnings, you also need to investigate risks. Keep in mind that you could

always get involved with more than just one type of investment. With this, any risks could be offset by profit potential from another investment.

No matter the type of cash investment you choose, remember the value of investment diversification in your investment portfolio. You know the old saying, “Never put all your eggs in one basket” and when it comes to investing your money, the same rule would apply.

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Money Market Accounts as Cash Investments


Of all cash investment opportunities, money market accounts are a favorite choice for millions of people. This type of savings account is unique, one designed to provide you with the best return on investment possible. However, to make money with a money market account, there are some important things to understand. Since most credit unions and banks have specific rules to follow, it would be advised to learn what you can first and then determine if a money market account is the right investment for your situation.

A money market account is similar to a standard savings account except interest on a money market account is set higher, the amount required is more, and the timeframe of which the account must be left open would differ. For example, a standard savings account may pay 2.5% interest, require only a $100 deposit, and have limitations specific to the amount of withdrawals allowed each month. On the other hand, a money market account would pay much higher interest, deposits of $10,000 are common, and the account would need to remain open before withdrawing any money for at least six months without being penalized.

The money you would deposit in a money market account is then invested. That way, you make a profit off the interest being paid to you by the bank or credit union but the issuer is also making money by investing the money wisely. Typically, the money would be invested in short-term instruments, those with a maturity date of 13 months or less. Choosing short-term investments helps cut down potential risk while not lessening earning potential. Obviously, the longer money would be locked into an investment the greater chance of something going wrong.

As with any cash investment, you need to realize that there are always pros and cons. Specific to money market accounts, three primary risks exist. However, by learning what these risks are would help you avoid them. For starters, remember that this type of cash investment is technically a type of security. Therefore, fund managers try to maintain the share price at $1 per share but there is no guarantee the price would stay there. This means if the price dropped, some or all of the principal money could be lost. On a positive note, losing money from a money market account is extremely rare.

Another potential risk associated with money market accounts has to do with rate variability. Because of this, knowing the amount of money you would earn for each following month would be impossible. Since market fund rates increase and decrease, exact profits are hard to guess. Obviously, when rates go up this is good for you but when rates go down, the amount of money you anticipated earning with the money market account would be less.

The third and final potential risk of a money market account relates to inflation. However, this risk is low. Other types of investments are long-term so as time goes by, any market fluctuations would affect potential earnings. Keep in mind that money market accounts are set up as short-term cash investments so inflation is seldom an issue but in rare situations, it could be. Therefore, it is important to know all possible risks.

Even with some risk, overall money market accounts are a good cash investment opportunity. The key is to find a financial institution that would allow you to open the account with the amount of money you have available to invest and that you agree to the terms based on your situation. That way, the investment ends up working for you, earning the most money possible.


Different Types of Cash Investments


When it comes to cash investments, several opportunities exist. However, as with any type of investment, you will discover that some cash investments offer a better return on investment than others do. Obviously, no matter the type of investment, the primary goal is to make money so as you look at the different options available, keep this goal in the forefront of your mind. In addition, we encourage you to research any specific cash investment of which you may have interest. The internet offers a wealth of information that could be used along with the information being provided in this article.

Just as the name implies, cash investments are those that would be easy to redeem without concern over being hit with a hefty penalty. Because investments such as this come with low risk, but also high liquidity they are popular. However, depending on the type of investment you choose, you may find that interest is low and in fact, sometimes low interest can be locked in, which is something you want to avoid.

The following examples are just a few specific to cash investments that you might consider although other opportunities would also be available.

Certificates of Deposit

Most people have a good understanding as to what Certificates of Deposit are but we wanted to provide a good overview regardless. Traditional Certificates of Deposit, which are usually referred to as “CDs” are a type of saving certificate in which a fixed interest rate would be applied. Interest would continue to accrue to the point where the CD reaches its maturity date.

Certificates of Deposit are issued through banks and credit unions and in most cases, interest paid is more than you could earn with a conventional savings account. In addition, this type of cash investment is flexible as far as denomination amount, and maturity range. Even so, most CDs mature in three to six months although they can be set for years. Once the CD reaches its maturity date, you would cash it in, getting the original amount back, as well as accrued interest.

Money Market Accounts

Another opportunity specific to cash investments is money market accounts. This special type of savings involves money being deposited, which is then used for the purchase and sale of fixed income securities. Although some are longer, most money market accounts are set up as short-term investments of six months or less. Available through banks and credit unions, this type of cash investment is typically very safe but return on investment would depend on the interest rate attached.

Keep in mind that the amount of money required to open a money market account varies but in most cases, it is $10,000 and more. The reason is that securities are traded in amounts that equal $100,000 and more so for you to take advantage of this cash investment to the fullest, you would want to put as much into the money market account possible.

Typically, money market accounts have strict guidelines, which you need to know. For instance, the account would mature on an established date so if you were to withdraw some or all of the money prior to that date, a hefty penalty would apply. Therefore, early withdrawal could leave you in a position of losing money on the investment instead of making a profit.


Certificates of Deposit Investments


When it comes to cash investments, many people will lean more toward Certificates of Deposit, more commonly referred to as CDs. Of all investments, cash and otherwise, CDs are by far the safest. Therefore, if a low risk but potentially rewarding investment attracts your attention, the information in this article would prove helpful. After all, even with little risk, it is still important to understand the characteristics of Certificates of Deposit.

Similar to a standard savings account, CDs pay interest on the money invested. However, the level of interest paid would be much higher on this type of cash investment than you would ever earn with a normal savings account. Because the amount of interest paid varies from one bank or credit union to another, it would be worth your time and effort to shop around for rates before you lock your money into anything.

Interestingly, when a Certificate of Deposit is purchased, the issuer is actually helping you with the higher interest rate. In return for them paying you more than you would make on a regular savings account, the bank or credit union hopes that you would make the decision to keep your money in the CD for a long time. With this, your money could be used by the issuer, either as an investment or money lent to other customers.

The process of buying a Certificate of Deposit is easy. All you need to do is walk into your local bank or credit union, telling them that you want to purchase a CD. From there, the amount would be deposited into a special account and interest would start to accrue. Now, many people think that in return for making a deposit, an actual certificate is provided but in truth, the process involves no actual paper exchange although official documentation would be signed.

During this process, you would learn the date on which the Certificate of Deposit would mature. Typically, this date has a 10 to 15-day window but not always. For instance, if you purchased a CD with a maturity date of 01/01/11, then you could withdraw the principal amount and accrued interest on the date or during the 10 to 15-day window provided. Another option is to reinvest the money, which could involve the full amount of principal and interest, just principal, or a portion of the principal.

It is important to realize that Certificates of Deposit with the longer maturity date actually make higher interest. Therefore, if you can afford to lock the money into a cash investment such as this for a long period, the return on investment would be much better than if you kept the money in the account for just six months. Because of this, as you begin to research different banks and credit unions that offer investments for interest rates, also check rates for a short-term versus long-term investment.

Of course, the current market will dictate how much interest is actually paid on a Certificate of Deposit account. As we all know, the economy has struggled in the past two years and while some stabilization is occurring, interest rates are still faced with fluctuation that goes along with market changes. Understand that even if you were to choose an issuer offering the best rate, if something were to

happen in the market causing interest to drop, then no matter what you do the amount of interest on a CD could change.


Value of Commodities Investment Historical Data


When it comes to investing in commodities, several factors would come into play to ensure you make the best decision possible for the highest return on investment. After all, the primary goal of investing in the first place is to make money so setting yourself up for success is the key to achieving that goal. Specific to this type of investing, one of the most important things you need to know is the historical data for a given commodity.

By looking at historical data for commodities, you would be provided with a window into the future, which would allow you to make more accurate trades. If you were in a room with 100, successful commodities traders and you asked each person what one element of trading made them successful, 99% would say looking at historical data. By using charting and tracking of commodity information, you have a huge advantage over other investors that overlook the value this step provides.

As you begin to look at historical data specific to commodities investing, you will find all types of information but the three primary things that you want to look for include the following:

1. Futures – This includes individual contracts from markets all over the world

2. Equities – Data for this would cover stocks, mutual funds, and index trading

3. Options – For this, index, along with equity data would be associated with contract history

To have a great career with commodities investing, it is essential that you see both supply and demand for the type of commodity being traded. With historical data, you would be able to look over a specific

timeframe to see exactly when prices rose and fell. Then with that information, you would have the ability to chart a course that would help you understand the different patterns connected to pricing change. In other words, using historical data in this way puts the trading/investing system to work for you rather than vice versa.

After going through this process, you would be able to invest in a certain commodity with confidence, knowing historically it had proven to be strong. It is important to know that tracking historical data for commodities investing is not difficult but learning the system would require some dedication of time and effort. However, by making a commitment, the result would be that the information you analyze and chart is the right information.

Of course, if you were limited on time or simply had little interest in tracking historical data, you could always hire a reputable company but then you lose some of the edge. Obviously, in return for assistance, you would be charged a certain fee but as a part of the services, you would receive not only the data for commodities investing but also guidance and support, if needed.

Let us say that you hired someone to provide you with comprehensive data for trade associations, government reports, industrial associations, and private industries. Using the historical data you were provided, trends could be changed and price movement projections identified. Typically, when a professional is hired to help with the research of historical data, graphs, tables, and charts would also be provided.

Remember, using historical data for commodities investing helps make the process easier and you ultimately more successful. The goal is to gain salient features and pricing changes in connection to war, politics, drought, and disease, preferably using data that goes back to 1950. Finally, it would also be important to understand major markets in relation to energy, interest rate, stock index, and currency, as well as supply and demand specific to the commodity of interest.

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Options on Commodities Investments


Words such as “NASDAQ” and “Dow Jones” probably sound familiar but in the world of trading, specifically for commodities investing, more needs to be understood. One of the most common mistakes made by people getting started with commodities investing is making key decisions without first spending the time to become educated. Unfortunately, not learning the inside and outside first comes at a price in the form of significant financial loss.

Interestingly, options specific to commodities investing is something that many people know little about, even those who trade on a daily basis. It is common to find investors that still believe a position in stock options is a great substitute for stock, but one with a greater advantage and less required capital. To avoid making the same mistake, you want to learn all you can about this type of investment so you end up making a profit, not a loss.

In most cases, options for commodities investing is something that only seasoned investors get involved with but starting now, you too can learn everything needed to become highly successful. One benefit of using options for commodities investing is versatile. With options, you would be able to adapt or adjust trading position whenever needed. Additionally, options can be used in speculative or conservative situations. Because of this, your investment position would be protected from the point of decline, or you could trade on market or index trade.

Because options are so versatile, the offer a definite advantage but again, it could be at a price. Remember, options are a type of complex security so using options them for commodities investing can be risky. In fact, the level of risk is so apparent that when dealing with options, contracts usually contain a clause stating so in black in white. Therefore, unless you are in a position to lose money and are dedicated to learning all you can about how to trade options with commodities investing, you may want to consider another kind of investment opportunity.

In summary, options are a contract, security in which the buyer would have the right, but not the obligation to buy or sell an asset at a specified price on or before an established date. While options for commodities investing are similar to stocks and bonds, remember they offer security. In addition, any contract involved for options would have strict rules and regulations. Once the contract is agreed to and executed it becomes legally binding.

An easy way to understand options for commodities investing is with the following scenario. For instance, let us say that you were in the market for a new car and after shopping around you found exactly what you wanted. However, money needed for the purchase would not be available for another four months. Knowing this is the car you want, you get in touch with the seller to work out a deal whereby you would have an option or contract that within the four-month timeframe, you could purchase the car for the price agreed on.

Okay, for that option to be secured, you would be required to pay something to the seller. For instance, if the price of the car you wanted to buy was $20,000, the seller may require you to pay $1,000 to hold the vehicle during the four months. However, during that timeframe, the seller would legally not be able to sell the car to another buyer, nor increase the price of $20,000.

Just as with options for commodities investing, a few things could happen during that time. As you will see, good and bad things can happen with options for commodities investing but this risk is part of the game. Again, using the car scenario, consider what could happen:

• A discovery was made that the original owner of the car was someone famous and now deceased. With this new information, the value of the car increased from $20,000 to $200,000. Regardless, with the options in place, the seller would be legally required to honor the $20,000 price. Therefore, you could turn around and sell the car for $200,000 after completing the deal and walk away with $180,000 in profit.

• However, during the four-month period, it was found that the car had serious problems with repairs costing $5,000. Even though you made the options with the seller believing the car was in perfect working condition, according to the contract you would still be obligated to purchase the vehicle for $20,000. In this case, after paying the repairs, you end up spending $25,000 instead of the initial $20,000 agreed on.

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Gold Commodities Investments


Throughout history, gold is one commodity that has been traded for a variety of reasons. For starters, even during a flailing economy when times of financial and economic instability exist, gold is a commodity that is considered safe. In addition, throughout time, gold has proven to be strong and when added to a domestic portfolio, the gold commodity can actually help lower risk. Gold is also an ideal solution for creating a hedge when it comes to long-term inflation. Finally, of all commodities for investing, gold is the only one that is negatively correlated to the price of the United States dollar.

If you have interest in commodities investing but want to choose a commodity with little risk and great potential for return on investment, you should consider gold. In fact, while gold prices have remained stable with only a few dips in value, it is currently at record highs pertaining to value. Although there are many advantages to investing in the gold commodity, considering that gold trades in a variety of different markets all over the world, especially the two most important markets in London and New York, gives it a huge advantage over other commodities.

The London market has an extremely long history, along with the reputation for having the largest market for physical gold. During the early part of the 20th century, gold prices were set at the London gold fix, something that the rest of the world used for contract arrangements. These gold prices are then published and deemed “official” by consumers, producers, and world central banks. Additionally, both London and New York trade the gold commodity 24 hours a day in parts of the world to include Tokyo, Hong Kong, Sydney, and Zurich.

If you were to get involved with investing in gold commodities, you would have an option of choosing the form of gold, which includes coins, bullion bars, statement accounts, mining shares, gold options, accumulation plans, and mutual funds. While a little confusing, we have provided a brief description of each option to help you get started.

• Gold Coins – This type of gold is self-explanatory, which is simply coins made of gold.

• Gold Bullion Bars – For this, gold would be sold in various sizes and weights. For instance, a single gold bar begins at just one gram but can be as large as 12 ounces, which is called a “London Good Delivery”. Today, actually owning gold bullion is rare but it is still used for commodities investing. Commission earned by brokers for selling gold bullion is very low, making this

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