In 2019, my biggest financial regret is waiting so long to invest. Through this year, I learned so much about personal finance and wealth generation that even in just one quarter I was able to gain nearly 6% (and Tesla TSLA was not even part of my portfolio).
There are 3 types of investing that I do, and I will go from the safest to the riskiest.
Long Term Holding
In the last quarter, my long term holding has grown by 6%. A diversified portfolio of stock ETF’s (exchange-traded funds), commodities, and bonds, this is my safest and conservative portfolio. Depending on your risk tolerance, you can invest in specific companies that you believe in that have been shown to consistently grow.
For me, I focus on index funds because they are essentially a blend of a handful of companies that fall into a certain category. For example, one of my biggest allocations is the Vanguard S&P 500 ETF (VOO) is a blend of the 500 biggest companies in the United States. As a result of it being made up of so many different companies, a single company performing badly is offset by the other 499 that make up the fund.
Another benefit of this type of trading is that you are capable of earning dividends. What are dividends? Dividends are a sum of money that companies will pay you for investing your money with them. Not all companies offer dividends, but a good number of them do. Although there are technicalities before you are paid out dividends, when you hold onto dividend-paying stocks or funds for the long term, you are typically paid out on a quarterly basis.
Whereas long term trading is holding onto stocks for years, swing trading is holding onto stocks for days, weeks, and even months. Stock prices are cyclical, they go up and down and generally follow a trend. This means that you can find opportunities where a stock is finished with a downtrend and starting an uptrend. For example, look at this chart of Facebook (FB) over the last year. You see it moves up, then down, following cycles and general patterns. Patterns tend to repeat but are not guaranteed, so although you can try and predict changes you cannot guarantee what will happen.
By looking for indicators, support, and resistance, you can find prices to buy and sell the stock after a short period of time. This is a method I am still learning but have found success in, particularly with medium-sized companies (MidCap Stocks). I avoid penny stocks because they are too volatile and can rise or fall at the drop of a hat.
The scariest, most exciting, riskiest form of stock trading; Day Trading. This is the act of buying and selling a stock within a single day. At the end of the day, you close your positions and go to sleep with either your winnings or your losses. Since this form of investing is so risky, the Financial Industry Regulation Agency (FINRA) imposed the Pattern Day Trade Rule. This rule states that a person with an account below $25,000 cannot make more than 3-day trades in a 5-day rolling period.
This type of trading tends to happen with volatile stocks that have the potential to move significantly in a single day. You look at things like volume, RSI, and whatever indicators you feel so inclined to follow hoping that you have enough of an understanding and that the stock will follow the “rules” that you see. There are days where I have earned hundreds of dollars and days where I took bad trade after bad trade and lost all the money I had earned the previous day and then some.
Luckily, I have been able to slowly grow my account as I developed a better intuition and understanding of stocks and the market.
Arguably, in my opinion, this form of trading is the riskiest and is more gambling than trading. To me, Options is speculating on the market and placing a bet on whether it will behave in a certain manner. It is extremely profitable and can allow you to earn higher returns than regular trading, but this comes at the risk of losing everything on certain types of trades, or just being out the premium you paid to take a position. I will not go into this here because I myself don’t have the greatest understanding but this is something that I find too risky.
There is an inherent risk to the stock market no matter what. We are lucky to be living in one of the most prosperous economic times to date and there is no reason we cannot take advantage of that. By understanding our own risk tolerance and managing where and how we invest we can start to create an engine that creates new wealth.