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What is the difference between saving, investing,
trading, and speculating? Sometimes people think
they are saving, when they are really investing.
Or they trade when they are trying to invest.
Sometimes people simply don’t know the difference
between investing and trading so they just end up
saving. And that’s a real shame.
Wealth building comes from knowing your money
strategy and working it wisely. The main difference
between saving, investing, trading, and speculating
is the degree of risk you take with your money.
But in this era of volatility and in times of ination,
sometimes the conservative position puts money
at greater risk.
Let’s look at these choices.
Savings begin when you put aside a part of your
income and spend less than you earn. The foremost
goal with savings is preservation of capital. Not
losing money is more important than growing your
money. Typically, savers place their money in some
secure, low-risk place. If you ask yourself how to
save money, these are considered low-risk options:
a dependable bank, cash, physical gold, a savings
bond, or a certificate of deposit.
People save because they have a use for the money
in the future. They could save for education or to
buy a costly item, an expansive vacation, or a house,
to pay for a wedding, or even just for a rainy day.
Sometimes they save in order to put aside enough
money to invest. Most experts recommend having
a savings of 6-8 months of your living expenses.
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Advantage: Cash allows you to move quickly
when needed. You can invest when the right
opportunity comes along. If you have a medical
emergency or lose your job, you have money to
tide you over.
2.1 Savings, Investing, Trading,
Speculating
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Pant, Paula ‘How much should you keep in savings?’, Bankrate.com, 18 Oct 2014
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Risk: You could lose cash. Banks may fail. You
lose money as your savings typically do not keep
up with ination. You also lose the opportunity
to earn income from investing the
Investing puts your money to work for you
in a deliberate, productive way. Most experts
recommend at least a three-year investment
timeframe. And the longer your money is invested
the more it can work for you.
Most investments are into a business you think
will perform well. When it comes to more specific
examples of how to invest money, investors typically
buy into reputable companies with established
value. You may be a partner in a private company,
or own shares in a public company. Investors want
to see a return on their money. Returns come from
growth in the value of the company or dividends.
Advantage: You can grow your wealth much
faster with higher returns. Steadily compounding
dividends can grow your money exponentially.
Risk: Markets fluctuate with politics, current
events, news cycles, and business management.
You can lose money on pullbacks. Not all
companies prosper, some fail.
Trading is a kind of investing with a shorter
timeline. Traders look at potential profits in fast
moving markets. They may make many trades on
an hourly, daily, or perhaps weekly basis.
Traders take advantage of the volatility and
uncertainty of the financial markets. They seek to
profit from fast rises and falls that happen from
short term day to day activities. The markets are
always moving. Up, down or sideways. They want to
take advantage of every opportunity. Traders use
a variety of charting tools and analyses to predict
where the market is going and when the
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a variety of charting tools and analyses to predict
where the market is going and when the trend will
change.
While this kind of trading is considered speculative,
skilled traders manage their trades so the winning
trades outnumber the losing trades. They accept
losses as a part of the nature of their trading, but
work to minimise the losing trades and maximise
the winning ones.
Advantage: While past performance is no
guarantee of future results, well-researched
trading based on fundamentals and not emotion
has produced stable returns you are not likely to
see from other kinds of investments. Check out
eToro’s Popular Investors page where you’ll find
plenty of skilled traders who you can chat with
or whose trades you can copy.
Risk: You must be able to accept losses in your
account and have the self control to keep your
emotions in check as you trade. All trading
involves risk. Only risk capital you’re prepared to
lose and past performance does not guarantee
future results.
Speculating is high risk behavior. Here people hope
for big gains but also take on considerable risk. The
trade might be called ‘a long shot’. Typically, it’s very
difficult to assess the outcome as to whether it
will be in your favour or not. Speculators require a
keen business sense, strict safeguards and a deep
understanding of the market or they will soon
be out of business. Investors may speculate with
money they can afford to lose.
Advantage: possibly fast rewards.
Risk: Losing all capital plus MUCH more.
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Growing wealth requires the understanding of how
to make money. Some people think the only way to
earn money is through a job or working for it. But
investors know how to use money to make money.
This is called passive income because you didn’t
actively work for it.
Stocks: When you own your business, or are
a partner in a business, you get a share of the
business profits. Likewise, you share in any loss of
the business. If you own a stock, you own a share
of the company. You might own 1/1,000,000,000
of the company, but you are part owner. Some
companies pay dividends. That means they share
their profits with the stock owners.
Companies paying stock dividends often pay them
quarterly. They may also pay dividends monthly,
annually, or make special payments. People who
want to use this dividend income may ladder
these companies. That is, they choose stocks with
different dividend payout dates so they receive
income from dividends each month.
When companies grow, they increase in value. You
may make money as your stock price goes up with
the increased value. When the stock price does not
rise with the actual value of a company, the stock
may be called undervalued. If it’s priced higher
than the company’s true value, it means people
are willing to pay more than a stock is technically
worth. Stocks may be overvalued if shareholders
believe the company is likely to do great things in
the future.
Many investors specialise in finding undervalued
companies. They expect investors will eventually
see the value and the stock price will rise quickly,
giving them a better return. You realise the gains
from a stock that has grown in value only when you
sell the stock. Until then, it’s called a paper gain.
2.2 The Theory Behind Making and
Losing Money
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Bonds: A bond is a debt note or IOU to a
government, corporation, or municipality. You
agree to loan them money. In return, they issue
a bond for a fixed amount, a fixed time, and a
certain rate of interest. When you hold the bond
to maturity, you are promised they will pay you the
face amount of the bond plus interest due.
Investors make money through the interest paid
on the bonds. If interest rates drop, the value of
the bond may increase and they may make money
selling the bond before maturity. If interest rates
rise, the bond may lose value, although it should still
pay interest and return the principal at maturity. If
interest rates rise too high, you may actually lose
money by holding the bond to maturity. It will pay
you less than the cost of ination.
Some companies are less secure and a have lower
bond rating. These bonds usually pay more interest,
but they also carry more risk that the issuer will
default and you will not regain your investment.
These high risk bonds may be called junk bonds.
Currency Trading: Pairs money from two different
countries. When currency is traded between these
countries monies, they are called major currency
trades
British pound (GBP)
Canadian dollar (CAD)
Euro (EUR)
Japanese yen (JPY)
US dollar (USD)
Other currencies may also be traded. Traders sell,
or short, one currency to buy, or go long in, the
other currency. In a long EUR/USD trade, the euro
is sold to buy the USD.
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Traders speculate that the currency they sell will go
down in price or the currency they buy will go up
in price. If that happens they make money. If the
currency they sell increases in value or the currency
they buy loses value, then they lose money.
Commodity Trading: This trading started as
farmers or manufacturers wanted to lock in a
price of a commodity that would be delivered in
the future. These are called futures contracts.
Commodities can be ‘soft or have a limited shelf
life such as corn, wheat, rice, or cattle. Or they may
be called ‘hard’ or more long-lasting such as oil,
cotton, gold, silver, or lead.
Most traders do not want to actually own the
commodity. Rather they want to profit from the
changing prices. They buy a contract expecting
the price to rise so they can sell at a profit. If they
believe the climate, season, demand, or economic
factors will cause the price to drop, they may sell a
contract at the high price and hope to buy it back
at the lower price.
Commodity trading uses leverage and is speculative
and high risk. Traders lose money when the price
goes against them.
Stock Market Index: An index is a list of related
assets. They can be related by sector, size, market,
or category of asset. They are benchmarks to
indicate the value of the stocks that make up the
index. It’s a way of determining how well that sector
or market is doing. For example, the S&P 500 is
made up of the top 500 stocks trading on the New
York Stock Exchange or the NASDAQ. The FTSE 100
measures the value of the top 100 stocks trading
on the London Stock Exchange.
These give a sense of how the overall market is
doing.
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Market Sector indices help investors see the trends
in those sectors. The indices can be grouped by
country and by industries such as healthcare,
financials, commodities, agriculture, transport, etc.
These indices form the backbone for mutual funds
and exchange traded funds (ETFs).
The indices themselves can only be traded with
CFDs that are derivatives of the index. Mutual funds
and ETFs can be built by purchasing the assets in
the index and holding them in one fund. Investors
seek to profit by gaining value as the indices rise.
ETFs: ETF stands for Exchange Traded Funds
(ETFs), and it represents a basket of stocks or
assets that reect the index they want to duplicate.
They diversify your portfolio as they act like a single
stock, but hold a wide range of assets. The goal of
the ETF is to match the index exactly. They do not
use active management. They simply own the same
assets the index does. Typically they offer lower
fees than a mutual fund of the same kind. They can
be actively bought and sold, and you can buy and
sell options on them. ETFs have been designed to
gain (or lose) 3x the price change of the index as it
rises. A reverse ETF is constructed to rise in value
as the index falls.
ETFs can track a market (like the FTSE), bonds,
commodities, sectors and industries, foreign
markets, and currencies. Investors may profit from
ETFs as they match the bull market in a sector or
as they buy an inverse fund when the index drops.
Mutual Funds: These funds are actively managed.
They also diversify your portfolio as they hold many
stocks in one fund. While they may track indices
like EFTs, their goal is to beat the returns of the
indices. Managers of mutual funds buy and sell
assets in order to gain better returns. These trades
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can incur costs and have tax consequences.
Mutual funds are not actively traded on stock
exchanges. Instead, they are priced after market
closing. It may take several days to redeem your
mutual funds for cash. And there may be extra fees
associated with buying or selling mutual funds in
addition to the management fees.
Mutual funds may offer an easy set-and-
forget kind of investing if you choose excellent
management and low fees. If not, you run the risk
of underperforming funds with fees that strip you
of profits.
CFD Trading: CFD Stands for Contract for
Difference (CFD). Rather than buying or selling the
actual asset, money may be made trading a CFD
based on the underlying asset. You do not own the
currency, commodity, or stock. You simply have a
contract where you agree on the current price of
the asset and you have the opportunity to profit
from selling it or buying it back at a later date.The
asset never changes hands. But the profit or loss
that comes from the movement of the asset goes
to the CFD holder.
Investing gives you many ways to potentially make
money. Select a markets or investment tool that
is likely to meet your investment strategy. You
can simply buy or sell the stock, asset, or lots of
a commodity or currency. You might invest in a
REIT. You may also be able to trade options or
To reduce risk in any of these kinds of trades,
traders use stop losses, or fixed points at which
they will sell.
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Losing Money: Investors hope every trade will be
profitable… but they are not. Careful research
and preset stop losses can increase the chances
for wealth building. But most investors still fail
to prosper as statistics suggest they should. The
Dalbar study shows the S&P 100 index averaged
annual growth of 9.85% over the past 20 years.
The average equity fund investor only gained 5.9%
averaged over the same time.
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Why?
Most experts point to our emotions. Money creates
feelings of fear and greed. When the markets are
high, novice investors jump in…greedy for profits
and afraid they will miss out. When markets fall
investors panic and sell. At the bottom, when
equities are attractively priced, investors are afraid
to get back in. They’ve been burned once.
People overreact to both good and bad news. You
see security prices jump after earnings reports or
news events. The London stock exchange index,
the FTSE 250 dropped 14% after the Brexit vote,
but bounced back within a month. Scared investors
who dumped their equities took a huge loss. If they
would have held on, they could have profited. It’s
vital to base decisions on predetermined choices,
not emotions.
Investors also tend to be overly confident in their
abilities. They may exaggerate the ability of past
data to predict future movements. They may trust
their ‘gut feelings’. So, what can you do?
1. Tap into more experienced advisors or traders
to help you stay calm in a storm.
2. Set up a trading plan with rules you will follow,
and don’t deviate based on emotions or news
that may not affect the underlying value of the
security.
3. Research company values. If the valuations
15
Anspach, Dana. ‘Why Average Investors Earn Below Average Market Returns: Investor Overreactions Cause Poor Historical Returns’. the balance.
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remain good there is no advantage to selling,
even in a downturn.
4. Choose conservative, dividend paying equities
with good valuations and plan to hold them for
the long haul.
Simply knowing the pitfalls gives you an advantage.
Examine your emotions. If you are fearful, you
may be trading outside your risk level. Move to
investments with less volatility that you are more
comfortable with.
Because we tend to be emotionally driven, smart
investors and traders research, understand trends,
and use calculations to determine the best entry
and exit points. Then they trade based on the facts
they’ve gathered and not on their emotions.
Experienced day traders and swing traders know
that not every trade will be profitable. Instead they
work the law of averages. They plan trades so there
is greater upside than downside. Even if they lose
20% or even 50% of their trades, if they make more
money on the winner than they lose on the losers,
they can still profit. These traders work hard to
eliminate emotion from trades, win or lose.
Your investment methods, goals, and beliefs
depend on who you listen to. One source says the
stock market will fall, be defensive. At the same
time, another says it’s a bull market, go all in. How
do you decide who to listen to?
How does their philosophy match yours and
your risk tolerance?
Follow the money. How do they get paid?
Do they have a personal stake?
2.3 Who Is Your Source?
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What is their track record?
Let’s look at some advice choices to see how they
fit these criteria.
News Outlet Commentators: Their driving motive
is to get people to listen to them. The dramatic,
sensational, or unusual commands attention. They
give outsized attention to high-ying assets and
are less likely to comment on boring, safe, quiet
equities that may outperform over time.
Typically, they have no personal stake in the
investments. If their pick rises or falls - if they are
right or wrong - it doesn’t really hurt them. And
you’ll probably only hear about their winners,
not when they chose poorly. You may not find a
full track record of their investment advice. Their
choices may not fit your risk tolerance or cover
areas you want to invest in.
Your Friend/The Guy at the Party: Investment
tips can sound like a sure thing. Be careful. These
people don’t make money from their advice, but
what is their track record with past picks? You
may want to take the tip as a starting point to do
your own research. There you can learn the true
potential and see how it fits with your portfolio
strategy and risk.
Financial Newsletters: These have a wide
range of investment philosophies, focus, and risk
management styles. It’s easy to find one that fits
your investment style. You can see their track
records. It’s a straight transaction: you pay, they
give advice. They will tell you to what degree they
are investing alongside you.
However, their goal is to sell newsletters, so you
may see them talk about looming risks and dangers
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or actions you need to take right away! They may
do this to make you think you can’t invest without
their ‘wise’ guidance. And their predictions of future
events have only a modest degree of success.
Finally, they have to crank out recommendations
on a schedule. Great picks don’t always come like
clockwork so they may need to tout inferior ones.
Robo Advisors: Robo advisors offer a new low
cost way to invest. It replaces human financial
advisors with algorithms and computer formulas.
Investors can tailor their portfolio as they answer
a questionnaire that asks about their risk level,
among other things.This is an easy set-and-forget
way to invest. However, not all robo advisors give
the same returns. They can vary about 5% even
on a conservative portfolio.
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While costs are low,
investment companies may place these investors
into their own funds to gain revenue.
Popular Investors: Social trading platforms let you
follow and copy trades made by other investors.
With eToro, you can find an investor with your
risk tolerance. You’ll find it easy to spread your
investments over a wide range of asset as you copy
several different investors.
Each Popular Investor’s history is open for all to
see, along with their annualised profits. And you
can be confident they are fully invested in the
picks you follow. They are taking the same risks
you will if you follow them.You can even check out
the performance simulator. It will show you how
your assets would have performed had you started
copying at different intervals.
eToro Popular Investors receive payments based
on the amount of copiers or funds invested in
copying them. Thus, your success contributes to
their success. Of course, all trading involves risk.
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Anderson, Tom. ‘Returns Vary Widely for Robo Advisors with Similar Risks’ CNBC, 7 September 2016.
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Only risk capital you’re prepared to lose. Past
performance does not guarantee future results.
Trading history presented is less than 5 years and
may not suffice as basis for investment decision.
Analyst Consensus: Analysts throughout the
world spend hours poring over stock charts and
fundamentals. They inform their clients, usually
banks, investors, and hedge fund managers,
about ideal trends and trades. When you take the
aggregate, the total recommendations from many
analysts, you can get a feel for the security. You
may find answers to these questions.
Should you buy the stock?
What is the value of the stock?
Where do they see the stock moving in the
future?
eToro has collected this information under the
Stock Research tab in easy-to-read chart form. You
can see the analyst consensus as to whether to
buy, sell, or hold.
Another chart gives the estimates of stock price
increase or decrease. It offers a target price.
Because analysts differ, you’ll see high, low, and
average estimates.
The movement in hedge fund money also shows
where they think the stock will go. Sometimes
hedge fund decisions actually move the stock price
when large amounts of stock are involved. Hedge
funds are sometimes called ‘smart money’ because
they detect trends and valuations before the
average investor. Still, their advice is not foolproof
or guaranteed in any way.
eToro’s research page gives you insight into their
buying and selling patterns. One chart shows a
hedge fund buying and selling against the blue line
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of the stock price.
And finally, a simple meter tells you the sentiment
of the funds toward the stock.
Truthful advisors will tell you there are no
guarantees. Past performance does not guarantee
future results. Only risk capital you are prepared
to lose. They may talk about ‘high probability’ of a
security doing well, but no one can make promises.
You will need to do your research and make your
best decisions, which will lead to your own ‘high
probability’ of more successful trades.
Your capital is at risk. Past performance does not guarantee future results. This information is for educational purposes and not investment advice.
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