Stupid Ways to Spend Your Money #13 -... | Gather

Stupid Ways to Spend Your Money #13

Speculative Investments including

Commodities, stock options, FOREX, day trading, etc.

..Some products, services, and investments that are highly advertised (even here on gather.com) are simply bad and expensive products, things with many fine prints, and some are simply run as scams and fraudulent schemes.? This post covers tax refund loan which appears every tax season.

In Wikipedia, speculative investing in the U.S. is described this way:

Commodities - Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). The gold market is subject to speculation as are other markets, especially through the use of futures contracts and derivatives. The history of the gold standard, the role of gold reserves in central banking, gold's low correlation with other commodity prices, and its pricing in relation to fiat currencies during the late-2000s financial crisis, suggest that gold behaves more like a currency than a commodity.

Pro for Commodities:

• Hedge Against Inflation - One of the primary advantages associated with investing in commodities is that they act as a barrier against inflation.
• Increased Portfolio Diversity - They add diversity to your portfolio. Different types of assets react differently to fluctuations in the market, which can cause the value of your portfolio to increase or decrease over time.

Cons for Commodities investing

• Market Volatility - They are considered to be extremely volatile compared to other types of investments. This means they carry a higher degree of risk.
• Loss Potential - There is no guarantee that you can make a pofit with commodities.

Stock option - In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price (the strike). The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. The price of an option derives from the difference between the reference price and the value of the underlying asset (commonly a stock, a bond, a currency or a futures contract) plus a premium based on the time remaining until the expiration of the option. Other types of options exist, and options can in principle be created for any type of valuable asset.

• Pros of stock option: It gives you some sense of control over your own financial future. If the stock rises, your financial stability rises with it, especially if you purchased the stock at a reduced rate.
• Cons: On the flip side, owning too much company stock can have its drawbacks. Just ask the employees of Enron, WorldCom, Lehman Brothers and even General Motors (Stock Quote: GM). Some companies place limitations on how much stock you can buy and sell, which limits your ability to freely manage your assets, especially if the stock should start to slide.

FOREX - The foreign exchange market (forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.

The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states especially Eurozone members and pay Euros, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.

Pros of FOREX trading

• Leverage - Foreign exchange markets give investors a lot of leverage when trading.
• Round-the-clock trading - The markets are open 24 hours a day, five days a week.
• Lower fees - Fewer fees involved, in comparison to other markets like the stock exchange.
• Online services and tools - You can trade from the comfort of your own home.
• Automated trading software - You can use automated trading software that can make transactions for you depending on how you programmed the software.

Cons of FOREX trading

• Volatility - One of the biggest disadvantages of the forex market is that it is fast and volatile. Although this means that you can make money fast, the downside is that you can lose money just as fast as well.
• Leverage can work against you - Although good leverage can help you make bigger investments with smaller capital, it can also lead to losses that are greater than what you initially invested.
• Online connections may fail - Your Internet connection may fail, causing you more problems.
• Scammers - Perhaps the most dangerous downside of forex trading is that there are many scammers out there looking to steal your identity, your money, or your financial information. Scams range from phishing scams and hacking scams to fraudulent companies and fake software.
• 24-hour market changes - Although a 24-hour trade market can be convenient, it can also work against you. The fact that the market works around the clock means that prices and values can change at any time of the day.

Day trading - refers to the practice of speculation in securities, specifically buying and selling financial instruments within the same trading day, such that all positions are usually closed before the market close for the trading day. Traders who participate in day trading are called active traders or day traders. Traders who trade in this capacity with the motive of profit, assume the capital markets role of speculator.? Some of the more commonly day-traded financial instruments are stocks, stock options, currencies, and a host of futures contracts such as equity index futures, interest rate futures, and commodity futures.

Pros of day trading

• The most touted pro of day trading is that it can earn you serious money, provided that you can afford to take the risk, understand the inner workings of the marketplace and have a well thought out strategy.
• Day traders play a role in the overall marketplace, thanks to arbitrage --?a common day trading strategy that involves identifying market discrepancies.

Cons of day trading

• The bottom line is that day trading carries a high risk. There is never a guarantee that you will make money. In fact, according to the SEC, "day traders typically suffer severe financial losses in their first few months of trading."
• Day trading is expensive. You need software and the right computers to spot the price variations and access the necessary financial information.
• Because you may acquire capital losses and gains as a day trader, taxation can become a nightmare. Short-term capital gains, which are places on assets held for less than a year, are taxed at your income tax rate.
• You need to have risk capital, or money you can "afford" to lose, to protect yourself. The SEC also requires?that day traders have a minimum of $25,000 in their account at the end of the trading day if they plan on making at least four round-trip day trades over a five-day period.
• Another potentially negative aspect of day trading is that it is highly volatile, chasing after fractional changes.
• Day trading also comes with a steep learning curve and the chance you can fail. It is a high-pressure, stressful job that takes discipline and strategy, and you can't let your emotions influence your trading decisions.

Remedy - In all these investment methods outlined, several common threads become obvious:

• An investor must possess high level of detailed understanding of the trades
• These investments are volatile, speculative, and carry high level of risk
• Investors can lose all or more of their investment if they borrow on margins
• Most speculative investors lose big sooner or later

My advice is: if you don?t understand it, avoid investing in these highly speculative investment methods. ?Many such investors will tell you the same. ?These investments go against the KISS principle: if you can't explain the concept to a 4th grader, it's too complicated for YOU.

Save up emergency fund, and use debit card. Save up and pay cash for purchases. If you don't have the money, you can't afford it.? And most of all, spend less than you earn.

Next post will discuss Real estate / rental properties / flips

If I missed any topic that you want me to bring up, drop me a suggestion

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