6 ways of investing your money, what you should know and what to avoid.
By: Kurran Dewan
There are many ways to invest your money nowadays and in this article we are going to list all the popular methods of investing your money. Pros and Cons to each investing system, how they work and what you should look out for and what you should avoid.
In this article we will be looking at;
- Stock market
- Angel investing
- Property investing
- Venture funds
- Crypto Currencies
The stock market generally has a bad reputation, due to it’s association with cowboy traders, boiler room tactics, and “get rich quick” ideas.
Buying and selling stocks is really just a way to own a piece of a company. When you buy a stock at a certain valuation you are speculating that the price or value of the stock will go up at which point you can sell the stock for a profit.
If the price of the stock goes down you will be losing money, as the price is now lower than the amount you paid for it. You can decide to cut your losses and sell, or hold on to it hoping the price will rally back up.
The price of a stock is determined by the supply and demand of that stock. If there is more demand for the stock the price will go up, and if there is more supply the price will go down.
There are many other factors involved in the price of a stock for example, particular news about the company can lead the price to go up or down.
Buying and selling shares can be risky and you should only do it, if you have knowledge about it, or are financially comfortable taking a risk.
There are many trading platforms out there and tutorials on how to trade the stock market. If you are interested it does not take long to learn the basics and set up a demo account in which you can practice with virtual money before starting with real money.
If you are not interested in trading yourself but would like to put your money to work, you can let someone else do all the work for you.
Companies like Etoro allow you to copy other peoples trades. You can decide how much you want to invest and pick a trader you like. Your account will automatically buy and sell the shares bought by the person you are copying. There is very little for you to do in this instance and you can get on with your day, you don’t have to make any decisions or do any technical analysis on the stock, your trader will do all the work for you and you just pay them a small fee.
There are many different types of Crowdfunding, however in this article we will be looking at equity Crowdfunding.
Equity Crowdfunding is similar to the stock market as you are essentially buying shares in a company. The difference is Crowdfunding campaigns are usually smaller start-up companies rather than the big companies you will see on the stock market.
The idea is that you back a small start-up company in the hopes that it will grow to an eventual IPO or acquisition.
Companies raising money on a crowdfunding platform are usually looking to raise relatively small amounts of money compared to companies going for an IPO. The average raise on a crowdfunding campaign is around $400k- $800k. The investors are made up of a group of independent people looking to invest small amounts of money, you can usually invest as little as $10 depending on the platform.
Companies raising money through crowdfunding are generally quite riskier as they are early stage start-ups. Investing in these companies allows you to enter the world of angel investing without investing too much capital. It also allows you to diversify your portfolio as you are not putting all your capital in one business.
If you go down this route you should be prepared to hold your position longer than you would through the stock market as there is no secondary market for these types of companies. You should be prepared to lose your money unless the company exits through an IPO or acquisition.
The interesting thing about investing through crowdfunding is that you get to analyse the companies as an Angel investor. You can invest in the companies that you like or meet the criteria you are looking for.
If you are looking to Crowdfund, check out some of these platforms below.
What’s the difference between Angel investing and Crowdfunding?
As mentioned above, with crowdfunding you will probably invest smaller amounts of money into various companies. You will also likely have very little input into how the company is run, as you are pretty much just a shareholder.
With Angel investing you are likely to invest larger amounts of money for a larger portion of the company, for example you might invest $80,000 for 50% of the company making you an equal partner. In this instance you are wanting to be more involved in the running of the business and the growth strategies behind it.
This is an ideal solution for someone who wants to start their own business but would prefer to invest in a business with people who have the skills and knowledge to accomplish the goals rather than going at it by yourself.
If you are interested in Angel investing start by checking out Gunnga which is a platform that connects Angel investors with great start-ups.
Property investing is a popular type of investing and has proven to be lucrative if done right. If not done right or if you are inexperienced you can lose a lot of money.
The idea behind property investing is that you find a property below it’s market value, fix it up and then re-sell it. You can also buy a property put it on rent and wait for the market to increase in value and then sell it.
The property market has been known to fluctuate and the value of a property can be wroth less than you originally paid for it. This will put you in to negative equity, as the amount of financing you have on the property is greater than the resell value of the property.
It was once believed that property investing was the most secure of all investment opportunities as people believed that property prices will always go up.
This is not the case, as was proven in 2008 when the global recession caused property prices across the world to plummet. Many people lost a lot of money during this period and many people lost their homes.
Investing in property is known as speculation and you should be financially secure to take on a large risk.
Venture funds can be seen as a hybrid between Crowdfunding and Angel Investing.
Here’s how it works.
A VC (Venture capitalist) will open a fund. Let’s say they are raising a 5 million dollar fund. They will attract investors from around the world to put money into that fund (similar to crowdfunding). There is usually a high threshold to invest in these funds compared to crowdfunding. The minimum is usually around $25,000.
Once the fund has been completed and $5million raised, the VC will go looking for companies to invest in. The companies can range from early stage/ start-ups to growth companies. It is more likely to be growth companies as VC’s tend to invest big amounts rather than smaller amounts.
As you invested in the fund, you will own a portion of all the companies invested in by that fund.
The fund is fully managed by a group of fund managers who analyse the deals and find the best investments. The fund managers will take care of all the work that goes into completing a deal for example due diligence, tracking the progress of invested companies, legal work etc. The fund managers will take a fee to carry out this work and manage your investment.
Bond are essentially loans, borrowed from people rather than banks.
Bonds usually have a fixed interest rate, a fixed maturity period and a fixed principle. The way it works is that you will receive the interest payment of the bond every year of the maturity period and then receive back your initial principle at the end of the loan period.
For example. If a company is issuing a bond of $100 over 5 years and at an interest rate of 8%, you will receive $8 dollars a year in interest payments for 5 years and at the end of the 5 years you will receive your $100 initial investment back as well. In this case you would have made a profit of $40 over 5 years.
Bonds can be bought or sold on a secondary market and prices can fluctuate based on interest rates.
What is it?
Crypto currency is a type of digital asset used to purchase products and services. The idea behind it is that there is no centralised bank involved and exchanges are made through a blockchain technology allowing for anonymity.
The original and most popular form of cryptocurrency is BitCoin.
Towards the end of 2017 the price of Bitcoin surged to around $20,000 per BitCoin before dropping back down in early 2018.
If you had bought a Bitcoin just 8 month prior you would have paid only $1000 for it.
The only reason to invest in crypto currencies is if you believe that it is the future of the way we transact financially, and that the technology will become an integral part of our society over the next 10 years. If this is something you believe then it makes sense to invest in Crypto currencies today and hold it for a long period.
Bear in mind there is a lot of government interference with this technology and regulations could be put in place defeating the purpose of it.
The Cryptocurrency market is extremely volatile and prices can have huge fluctuations. You should be prepared to lose all your money if you venture in to trading Cryptocurrencies.