21+ Investing strategies

Before you dive in, make sure that investing is right for you. Don’t consider it until you’ve got a healthy amount of rainy-day savings kept aside and that you have the right financial mindset.

If you don’t have financial savings in the bank or have access to financing and investing knowledge, you can’t be an investor.

If you do want to invest, you must have the commitment, time and knowledge to do your own research and due diligence on the risk and financial returns on the asset you are investing in.

Your investments will make money in one of two ways:

Paying you passive income in the form of regular payments like interest, dividends, rental income, and royalties.
Increasing asset value due to capital growth over a period of time.

Always seek independent advice from qualified or accredited professionals when you want to invest. Develop your investment goals and strategies prior to investing in any asset.

Always invest in your own education and knowledge. Without proper financial knowledge, literacy, and competence, you may not know which investment vehicles and returns you need to reach your financial goals.

Remember that there is a world of difference between speculating and investing. Most people speculate, rather than invest.

All investments carry some degree of risk

All investments carry some degree of risk – it is something you need to consider when assessing each and every investment.

Take a moment to reflect on these questions:

What are my goals?
How much money should I invest?
Where should I invest: the share market, bank deposits, property?

Investing isn’t easy and anyone who thinks otherwise is simply naive. It’s probably because they are yet to have a bad experience.

One of the most important strengths possessed by all great long-term investors is their ability to ignore short-term ‘noise’. Unfortunately, this skill is not one held by many.

It’s not uncommon for investors to believe that a few hours a week and a well-funded brokerage account is a sure-fire recipe for investment success.

In the share market, for example, all investors big and small are competing with professional investors for whom investing is a full-time job.

The dangers of being sucked into the latest fads being peddled by lazy brokers, planners or seminar providers are real. Investors need to be made aware of these dangers or risk losing out.

Diversify your investments

Invest in a well-diversified portfolio that comprises of a mix of assets such as shares, real estate properties, managed funds, cash, and bonds. This is the best way of spreading and reducing your risk and smooth out investment returns because each asset class behaves differently and have their own cycles.

Generally, assets should put money into your pocket and give you the required cash flow. In comparison, liabilities take money out of your pocket, reducing your money in the bank.

You may choose to invest in a single asset class or industry. This will usually mean that your returns are more volatile as you may have big gains in one year and big losses in the next. You may also be ‘betting’ that a particular asset class or industry sector will outperform all others.

Weigh up your risk and returns

Successful investing requires an understanding of the basic risk and return relationship for various asset class or general investing principle where ‘the higher the perceived risk, the greater the potential return or loss.

Your idea of risk may be completely different from other people. Your perceptions of risk aren’t necessarily a true reflection of the actual risks. It’s important to have a clear understanding of your risk profile and appetite for risk-taking, your reasons for investing, and your long-term financial goals.

Think about how comfortable you are with the possibility of losing all your money (worst case), your time frames to achieve your financial goals, and how you can emotionally deal with volatile returns and market downturns.

Your risk profile consists of different attitudes toward risk; whether it is aggressive, moderate or conservative.

You need to consider investments that balance your appetite for risk with their ability to reach your financial goals within the given timeframe. If your timeframe is short and you have a big financial goal to achieve, you will be aggressive to earn as much in the shortest time possible. You may take a higher level of risk in order to do so. This is a decision that is very specific to you. Only you can determine your own ‘sleep at night’ factor.

A higher level of risk also means that you may also lose a lot more if things go as planned or there are unexpected events.

Pay off your credit card debts first

If you owe money of any kind (i.e., credit card debt, student loan, car loan, etc.), you need to pay these off first before investing (or starting a business). The only exception to this is your existing home mortgage where you are using other peoples’ money to make money.

Using credit card debts for financing lifestyle expenses is considered ‘bad debt’ whereas having a home mortgage for the purchase of a real estate property is considered a ‘good debt’.

You don’t have to be rich to invest

There’s a big notion that only those with a lot of money should invest in stocks or mutual funds.

Even though you most likely won’t be rich overnight, it’s never a bad idea to use investments as a way of saving.

Visit websites like Acorns and Stash.

Earn interest on your savings

If you have extra cash lying around or deposited in a bank account, you will receive regular interest income at the prevailing interest rate.

Due to the very low-interest rates experienced currently globally, savers are losers when inflation is factored into the equation. Any interest income earned from your savings will be consumed or offset by inflation.

At best, you can shift your savings to a bank that pays a higher yield or income on your savings or use your excess money to invest in income-producing assets that can grow in value over time.

Investing in real estate properties

Real estate investing can be a great way to make money when the due diligence and financials stack up and property market is favorable.

With real estate, you should use the leverage of other people’s money (OPM) to purchase the property. You borrow money from the bank to generate regular passive income for yourself, including capital growth, if you have selected the right property in the right growth location.

Buying a real estate property isn’t for everyone. Real estate properties include houses, units, apartments, and car parks. Yes, even car parks.

You shouldn’t jump at the opportunity to buy real estate especially any real estate property. Buying real estate is a huge financial and emotional commitment. Problems do arise, especially with tenant issues, if you don’t fully think about how this big purchase will affect your life over the long term and your sleep-well factor.

Key ways to make money with real estate property investing.

There are three basic ways to make money with real estate investing using more or more of these property investment strategies:

Capital growth occurs when the property appreciates in value naturally when the property market does most of the heavy lifting whilst the property is being rented out to tenants. Capital growth is driven primarily by the location of the property (if chosen correctly). This is a passive property investment strategy that is suited for time-poor investors.
Positive cash flow (i.e., money flowing into your pocket) occurs when you have income remaining or surplus from renting out the property to a tenant after paying all expenses (includes mortgage repayment, insurance premiums, government rates and taxes, and property management fees). This is a passive property investment strategy that is suited for investors wanting some cash flow in their portfolio. (Note: When it comes to capital growth versus positive cash flow, people lean towards capital growth because you can make larger sums of money in the longer term without doing anything.)
Manufactured, where value or equity is added to the real estate property through active property investment strategies like renovation, subdivision, or development. This strategy is suited for knowledgeable buyers who have the time and commitment to manufacture value and equity for the real estate property.

These property investment strategies differ from property strategies (i.e., buy and hold property strategy) which will be covered later.

Seven steps to buy the right real estate property

There is seven simple, yet powerful, steps to buy the right investment grade real estate property that is located in the right location.

Let’s be clear. There is no such thing as a perfect real estate property.

Identifying an investment grade property is all about mitigating your risk of buying in the wrong location, buying the wrong type of real estate property and buying at the wrong end of the price range.

This process of mitigating risk takes time, commitment, and effort on your part. It takes significant research and due diligence. Above all, it takes patience, knowledge, and experience.

(1) Why am I buying a real estate property?

Buying a real estate property is just a means to an end (e.g., financial freedom). It’s one of many options you have to generate wealth or passive income for yourself.

So, what is it EXACTLY that you want to accomplish by buying a real estate property? What are your real motives or reasons for owning real estate?

(2) What are my goals and strategies?

Based on your unique strengths, serviceability, risk profile, age and personal commitments, map out the goals you want to achieve and determine by when you want to achieve these goals.

Your goals are defined by your whys.

As an example, “I want to lose 20 kilograms” is a why because it represents a future outcome. “I want to run five kilometers a day for six months” is a measurable goal because it represents some future specific and measurable action you intend to take that will help you achieve your dream of losing 20 kilograms.

Here’s the rub. People don’t plan to fail. They simply fail to plan.

Your plan can consist of six different type of goals:

Mindset goal to develop a positive financial mindset (e.g., read books or listen to pod casts prepared by people who are successful in building wealth). The reality is that if your subconscious financial mindset is not set (or re-set) to a high level of success (especially for financial success and the achievement of goals), nothing you read, nothing you learn, nothing you know and nothing you do will ever make much of a difference. Not a bit!
Education goal (e.g., I will read at least five property investing books in the next six months). Remember, education is a process and financial literacy is important for your success as an investor.
Lifestyle goal (e.g., I want to own X number of properties by 20XX).
Yearly income goal (e.g., I want to earn a passive income of $100,000 annually after I retire).
Financial goal (e.g., I want to own $2.5 million in debt-free assets when I retire).
Time goal (e.g., I want to retire by 20XX).

Alongside your property investment strategy (i.e., passive and active investment strategies), you need to consider having the following complementary strategies:

Finance strategy – This strategy sets out how you plan to finance your real estate property purchase and its activities, how much is needed and by whom, and where it will come from.
Debt reduction strategy – This strategy sets out how you plan to reduce your debt over time. The aim is to be debt-free!
Tax reduction strategy – This strategy sets out how you plan to reduce the amount of tax payable by using tax credits, exemptions or deductions that relate to real estate ownership.
Asset protection strategy – This strategy protects your assets, income, wealth, and legacy. This could be done via ownership structures, insurances (e.g., income protection, total and permanent disability insurance, etc.), prenuptial agreement, personal Will and testamentary trust.
Contracting strategy – This strategy includes the relevant legal safeguards or appropriate contractual conditions like finance and inspection clauses. Hire an experienced legal practitioner to assist you with drafting and inserting the appropriate contractual safeguards to suit your property investment strategy, personal circumstances, and risk appetite.
Exit strategy – Starting with the end in mind will give you a perspective of what is needed and when to exit the real estate market. Your exit strategies include: (i) the never sell exit strategy; (ii) the live off my properties’ rental income strategy; and (iii) the sell property strategy.

(3) Which professionals and mentors should I use?

Buying a real estate property is a team sport. You may want to hire independent and experienced professionals (e.g., property coach, accountant, etc.) to help you develop tailored or customised investment strategies to suit your personal circumstance, serviceability, risk profile and strengths. Or you can do it yourself.

The most expensive advice is often free advice. It’s advice about money, investments, and business that you can get from your friends, relatives, and colleagues who are not investors themselves.

Don’t forget that there are ’experts’ who just want to sell you properties or services without any consideration of your personal circumstances, serviceability, and strategy.

(4) Who legally owns the real estate property?

The key question, “What name do I put on the contract (of the sale of the real estate property)?” should always be answered well before you start searching for a property to buy (e.g., well before auction or inspection day).

Your ownership structure will depend upon a variety of things – your personal situation, your goals, and your financial and risk-taking capacity, and your family arrangements.

There are many ways to own a real estate property. Each ownership structure has its pros and cons. No one legal structure is perfect.

(5) How much money can I borrow to buy a real estate property?

Real estate investing is really a game of finance. When you can’t get more finance, you can’t grow your real estate investment portfolio.

If you are going for a mortgage financing like most people, your aim is to get the right loan type, structure, and features to match your investment strategy, ownership structure and buying criteria. Avoid cross-securitisation of your mortgages and credit facilities, if possible.

Alternatively, you could release available equity from an existing property you own if the outstanding loan or mortgage amount is much less than the current market value of the real estate property.

Always get a written pre-approval from your lender or financier well before making any investment decisions. This finance pre-approval will give you a good indication as to the type of property you can afford to buy and in which location the property is located.

(6) When do I buy and sell real estate property?

The property clock tells you when to buy, period to hold and when to sell a property. It has two major time segments.

12:00 o’clock – The property cycle reaches its peak point. Supply is low and prices are high.
6:00 o’clock – The property cycle reaches its lowest point. Supply far exceeds demand and prices are low.

Depending on your investment strategy, there are different timing options available:

If you are a passive investor, time in the market may be more important.
If you are a speculator, timing the market may be more important to generate a profit from a quick sale (e.g., flipping the property). Ideally, you may want to select a property that is at the 10 o’clock mark of the property cycle.

(7) Where and what do I buy?

One essential factor to look for in considering the location to buy your real estate property is the property clock. Each state and location have its own property cycle where each suburb and each street can make up different property markets.

Beware of ‘hotspots’. Make your buying decision based on proven long-term performance and due diligence rather than short-term speculation.

Knowing what type of property to buy and identifying which location to buy in will require you to think about the property market cycle (or property clock), projected population growth (especially with high disposal income), proposed infrastructure and local council zoning plans, what people will be looking for now, and what they will want 10, 15 or 20 years from now.

Armed with a property investment strategy, buying criteria, a written pre-approval from a lender or financier, and a determination of your legal ownership structure for the property, it’s time to go shopping for the specific property and attend inspections.

In order of priority, start with the research of the property cycle, market, suburb, and street. Then perform extensive due diligence on each selected property and location. Look at projected population and infrastructure growth and history before you buy, noting that the past does not necessarily predict the future performance.

Make decisions based on facts and evidence rather than word of mouth, assertions, and assumptions. Let the numbers do the buying (i.e., buy objectively with your head). Do not buy with your heart (i.e., don’t be emotional about the property).

Eight real estate strategies

There are eight real estate strategies you can adopt when investing in real estate.

Strategy 1 – Buy and hold property strategy

The buy and hold real estate property strategy is a passive investment strategy. This is where a time-poor property investor buys investment properties on credit or mortgage using other people’s money and holds them for a long period of time, regardless of fluctuations in the property market. During that time, the investor rents these properties out to tenants who will help them pay down the mortgages or outstanding amounts.

Buying the right property in the right location, at the right price, and at the right point in the property cycle can yield both short-term gains and long-term capital appreciation. Good property selection is vital as you rely on the market to do the heavy lifting to generate the required long-term capital growth for the property.

Capital growth is about timing the market as it is time in the market. Perform sound due diligence to select the right property.

When the property has accumulated sufficient growth in value, you release the excess equity in a property to buy another investment property. You do so by revaluing and refinancing the property. Set up a line of credit (loan facility) with a lender or financier for up to a percentage of the available equity. This amount is your property investment budget that you are comfortable with. Most importantly, you should not go over this budgeted investment limit.

In the future, you may sell down existing mortgaged real estate properties to reduce your mortgage debt.

The goal for wealth creation and financial freedom is to own debt-free properties that will generate pure rental income or positive cash flow in the future.

Strategy 2 – Negatively geared property strategy

This property strategy is best suited for busy high-income earners who are time poor. It takes less work to find fully negatively geared investments than other forms of real estate investments. Just look in the best inner city suburbs to buy.

Negatively geared property generates more expenses than you earn in rental income before you take tax savings into account. That is, rental yields or income are lower than mortgage repayments.

Negative gearing is the practice of investing borrowed money in such a way as to result in a financial loss that can be claimed as a tax deduction.

In essence, a negatively geared property loses money. It takes money out of your pocket. You have to cover the losses yourself before tax time each year from your savings.

People use this property strategy mainly as a tax-minimising strategy. They reduce their tax liability by offsetting the losses from owning negatively geared investment properties against other income earned (e.g., salaries, business income, etc).

The disadvantage of this property strategy is that without a very large income source, at some point, the investor’s serviceability would stop them from adding more properties to their real estate investment portfolio. The average wage earner cannot afford to grow a real estate portfolio continuously using full negative gearing for all properties. The accumulated losses will become too great.

Saving tax should not be the sole or primary reason for choosing an investment or property strategy. Nor should you ignore the tax benefits associated with negative gearing a property. Instead, it should be a by-product of property investing.

Working in conjunction with the buy and hold property strategy, you may buy and hold a negatively geared property for a period of time.

For a negatively geared property, you make money from capital growth if the property is bought in the right location (e.g., right price, right market, right suburb, right street, and right address on the street). Unfortunately, rental yields or income may be very low for such properties; hence, the losses.

Note that capital growth and rental yields have an inverse relationship.

There is an assumption that there will always be capital growth. This is NOT always the case especially when the property is purchased at the wrong location or at the wrong time in the property cycle.

Negatively geared properties are usually located in inner suburbs of cities and in major towns. The demand is higher due to land scarcity, population growth, and infrastructure maturity.

Unfortunately, you cannot buy capital growth properties without cash. There needs to be a good balance or trade-off between rental yield and capital growth. This depends also on your real estate investment strategy, risk profile, and financial goals.

Strategy 3 – Positively geared property strategy

Positively geared properties are properties that generate more rental income than you have to pay in expenses before you take tax savings into account. This is the flip side of a coin from negatively geared properties.

This property strategy works in conjunction with the buy and hold property strategy.

The positively geared property requires you to pay income tax on the excess rental income received.

Genuine positively geared properties should give you the expected cash benefit before tax. You are not reliant on any tax deductions or refunds to give you the positive cash flow. You owe the taxman money because you are making a financial profit from the excess rental income you receive.

By combining negatively and positively geared properties in one real estate investment portfolio, they will help you in your serviceability. It’s a balancing act to ensure that investors can continue to move forward in building their real estate investment portfolio.

Positively geared investment properties are usually located in outer suburbs of cities and in regional and rural areas. Because there is less competition, these properties usually grow at a slower rate (e.g., they have lower capital growth) despite their good rental yields and income.

Regional areas tend to be sensitive to economic cycles and have slower capital growth over periods of time unless there is an economic change to the area. In addition, jobs growth may be slower, unemployment may be higher, wages growth can be generally lower and there is no shortage of land for further development.

Strategy 4 – Cash flow positive property strategy

Cash flow positive real estate put cash in your pocket after depreciation and tax deductions are taken into account. This is where your investment property is cash flow positive due primarily to the benefit of the tax refund claim you received. Without the benefits of your tax refund claim, you will experience a negative cash flow.

This negatively geared property with positive cash flow strategy is best used by property investors who are not in the highest wage bracket. It works in conjunction with the buy and hold property strategy.

This strategy is suited for those who have a bit more time to learn, research, and scout around for the appropriate cash flow positive property. It may take some time to find a cash flow positive property that has some capital growth.

Like positively geared properties, cash flow positive properties include properties located in the outer fringe suburbs of cities, serviced apartments and student accommodation. Because there is less competition, these properties usually grow at a slower rate (e.g., have a lower capital growth) despite their good rental yields.

Rental yields may still increase due to inflation and tenant demand in the area. The tenant profile may also differ when compared with those living in the city.

Strategy 5 – Buy property to renovate property strategy

Renovating a property is an active way to manufacture equity and add value to the property. This active property investment strategy allows you to fetch a higher property sale price if you decide to immediately sell the property after the renovation (a process known as ‘flipping’).

Or you could re-value and re-finance the property immediately after renovation and extract the excess manufactured equity to purchase another property.

A freshly renovated property allows you to fetch a higher rental income if you do decide to keep the renovated property as a rental for yourself.

Renovation may sound simple and sexy. It’s an active property investment strategy that requires time, commitment and knowledge, especially if you do the renovation yourself.

Even if you do not do it yourself, it still requires a lot of management and close supervision of contractors and trades people to bring the renovation project within budget, scope and time.

It also takes a lot of time and commitment to finding the right property that can make the financial numbers work. The key thing to remember is that you want to make a financial profit from the renovation.

Your goal is to create enough manufactured equity on the sale (or revaluation) to make it worth your investment in time, effort, and money.

It’s very easy to underestimate the time, cost and work involved in a renovation project if you are not careful or experienced.

Basic cosmetic renovations can help investors increase their profits and equity on a shoestring budget within a short period of time.

Property renovations do not have to be major to add instant perceived value. Cosmetic renovations (when compared to structural renovations) have lower town planning requirements and complexity. They do not carry the risk inherent in major renovations. They can be as simple as having a new coat of paint, exterior cement renders, updated kitchen, updated bathroom, updated front façade, a new outdoor entertainment area, and improved landscape.

Strategy 6 – Partnerships and syndications property strategy

A time-poor, cash-rich property investor can find a time-rich, cash-poor partner who has the knowledge to renovate or develop a purchased real estate property. The partner can do all the daily running around for the partnership.

A clear expectation of what each partner will bring to the project is vital. This could be done through a written contract.

Multiple parties can also come together to contribute time, knowledge and finance to buy existing properties and land to renovate or develop.

Whilst this property strategy may have a higher return, it entails more risk and trust amongst partners. It must also suit your risk profile and strengths.

Strategy 7 – Property subdivision and development property strategy

Like renovations, property subdivision and development are active property investment strategies that manufacture equity and add value to the land or property. Active strategies can create positive cash flow properties and profit that are not totally dependent on location and market cycle.

There is potential for you to make good profits and create instant equity instead of waiting for market-led capital growth over time. However, subdivisions and developments are complex businesses. It takes time and commitment on your part to pull those off successfully.

It’s also easy to make a loss if you don’t know how to do it correctly. You have to be able to read the property market extremely well and know when it’s time to sell the properties after development.

There are potential delays in every step of the development process; planning, permits, approvals, finance, and construction. These delays can cost you money and time.

Property development requires a larger capital commitment. Your lender or financier must be comfortable with your active property investment strategy. They must also be comfortable with your experience and skills to successfully execute this property strategy.

Strategy 8 – Real estate investment trusts (REITs)

You can invest in a real estate investment trust that owns or finances income-producing real estate properties as a unit or shareholder.

Modeled after mutual funds, REITs provide you as investors regular income streams, diversification, and long-term capital appreciation. The trust fund typically pays out all of their taxable income as dividends to shareholders or investors. In turn, you pay income tax on those dividends received.

There are three types of REITs you can invest in.

Equity REITs that invest in and own real estate properties. Their revenues come principally from leasing space to tenants. They then distribute the rental income they’ve received minus expenses as dividends to shareholders. These REITs may sell property holdings. In which case any capital appreciation or gains are reflected as dividends you receive.
Mortgage REITs that invest in and own property mortgages. They loan money as mortgages to real estate owners or purchase existing mortgages or mortgage-backed securities. Their earnings are generated primarily by the net interest margin. It’s the spread between the interest they earn on mortgage loans and the cost of funding these loans. This makes them potentially sensitive to interest rate increases.
Hybrid REITs that invest in both properties and mortgages.

You can invest in REITs either by purchasing their shares or units directly on an open exchange or by investing in mutual funds that specialise in real estate. Some REITs are public listed and some are private (i.e., not publicly listed).

Investing in paper assets

As part of your investment strategy to earn passive income, you could also invest in a number of paper assets like annuities, bonds, currency notes, exchange-traded funds (ETFs), foreign currencies, Government securities, insurance, managed funds, stocks, stock options, and stock futures.

Generally, you transact through a registered broker within a licensed broking company or business when you want to buy and sell your interest. You set up a trading account with your nominated broker and transfer enough funds into that account to cover your purchases, brokerages, and fees.

Investing and owning shares in a company

If you like to be a part-owner of a company, you can buy shares of that business in a public stock market as an investment. Shares are also referred to as stocks, securities or equities.

As a shareholder, you may need to make decisions about taking up various rights and benefits offered by companies you have invested in. In each case, you should keep your investment goals and strategy in mind and decide whether to consult a qualified adviser or not.

There are two main classes of shares: ordinary shares and preference shares. The different shares can vary greatly in the rights that they offer holders and in the obligations that they entail.

There are two types of shares: industrial shares and resource shares. Industrial shares are shares in companies that engage in the production of products or services. Resource companies engage in the exploration and mining of earth’s resources such as gold, oil, and gas.

If you’re willing to put in the time and keep an eye on the stock market and economy, building a portfolio of shares can be rewarding. Choosing shares to buy and sell requires time, research, due diligence, and analysis.

A share of stock is basically a tiny piece of a company. Shareholders, or people who buy the stock, are investing in the future of a company for as long as they own their shares. The price of a share varies according to economic conditions, the performance of the company and investors’ attitudes.

The first time a company offers its stock for public sale is called an initial public offering (IPO). It’s also known as ‘going public’.

When a business makes a profit (revenues minus expenses), it may share that money with its stockholders by issuing a dividend. A business can also save its profit or reinvest it into improvements to the business.

Ways to make money

Investing in the share market is not a guarantee of financial wealth. In fact, it is quite possible for share market investments to perform badly and lose money. The risks of investing in shares are:

Share prices of a listed company can fall dramatically, even to zero.
If the listed company goes broke, you are the last in line to be paid. You may even not get your money back.
The value of your shares will go up and down daily depending on the performance of the stock market. The dividend you may receive may also vary.

People make money from owning shares in two ways (similar to real estate):

Returns from capital growth – If you buy 1,000 shares in a company at $10 and sell them at a later date for $15, you have made a profit of $5 per share, or $5,000 (1,000 x $5). You may be liable to pay personal income tax on this capital gain when you sell the shares. A share price goes up because people value the shares in that company and offer increasingly higher prices to buy them. This may sound simple, but there is no guarantee shares will rise in price while you own them.
Income from dividends received – Some companies may pay out profits to investors or shareholders as dividends. The cash payment is generally made once or twice a year to all shareholders. The amount you receive as income is directly proportional to the number of shares you own in the business.

When you buy and sell shares on a stock exchange like the New York Stock Exchange, the NASDAQ, and the Tokyo Stock Exchange, your orders must be entered into the stock exchange system by a licensed or registered broker. Brokers buy and sell stocks through a stock exchange charging you a commission to do so. The rate of broker commission you have to pay will depend on whether you use a discount brokerage firm, a bank or a full-service brokerage firm.

Selecting the right brokerage service

Choosing a stock broker that suits you will be dependent on a range of factors such as price, reliability, product range, what features they offer that suit you, and the type of investing or trading you want to do.

Stockbrokers may be online or phone-based (or both), maybe non-advisory or full service, and may also offer managed portfolio services.

You can buy and sell stocks online using an online broker. It largely takes the place of a human broker. Instead of talking to someone about your investments, you decide which stocks to buy and sell, and you place your trades yourself using an online system provided by your broker. Online stock brokers are considered ‘execution only’ arrangement and do not provide specific advice on what shares to buy or sell. They should train you on how to use their online trading system.

A full-service stockbroker, on the other hand, will assist you in filling out all paperwork, provide investment advice on what shares to buy or sell, and place the trades on your behalf based on your instructions to the broker. This service will cost you more.

A stock exchange is like a warehouse in which people buy and sell stocks. A person or computer must match each buy order to a sell order, and vice versa.

Once you have identified which company shares to buy, enter an order for the number of shares you want to buy and specify the buy price. Your stockbroker will email you a contract note after the transaction is complete.

Investing in mutual or managed funds

If you are time-poor or don’t have the technical and investment skills and experience to pick the right company stocks to buy, invest in mutual or managed funds.

Picking the right fund is a lot like selecting the right kind of company stock to purchase.

A mutual or managed fund is an investment vehicle made up of a pool of funds collected from or contributed by many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets in accordance with the investment objectives stated in the fund’s prospectus. They are operated and managed by professional managers who invest the fund’s money to generate capital gains and income or ‘distributions’ for all investors in the fund or fund holders.

Managed funds are popular with investors as they make it easy to invest. One transaction can provide access to a range of underlying investments that are professionally managed. They also provide access to investments that may otherwise be out of reach.

One of the main advantages of mutual and managed funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds, and other securities. Each unitholder or investor participates proportionally in the gain or loss of the fund.

When you invest in a mutual fund you are buying ‘units’ in the fund. The number of units you get as a unit holder depends on the unit price at the time you invest, which may change daily because of the rise or fall of the value of the underlying assets held by the fund. Each unit represents an equal portion of the fund’s value. You may receive regular payments called distributions from the fund. These are based on the profit or income the fund receives from the underlying investments.

Managed and mutual funds can be a good investment vehicle as they:

Offer diversification to investors.
Are professionally managed on your behalf.
Can access a broad range of assets or markets with a relatively small amount of cash.
Allow you to make regular contributions and withdrawals.
Reduce paperwork and make completing your tax return easier.

Depending on the type of fund you choose, the convenience may come at a price, as:

You may be charged higher fees as fees may vary widely.
You may not be able to convert your investment into cash when you want to because of the nature of the underlying asset, especially real estate.
You rely on the professional skills of other people and you do not control investment decisions (e.g., what to buy).

You can either invest in an active or passive fund:

Actively managed funds are those where the fund manager aims to outperform the market by frequently buying and selling underlying assets that they think are going to do better than others. As you are paying for the aggressive investment skills, these funds can be more expensive.
Passively managed funds (or index funds) buy a portfolio of assets that follow an index. These funds should generate a return, before fees, that is almost the same as the index it is tracking. They may be cheaper as you are not paying for lots of investment expertise that follow the market on a daily basis.

Investing in bonds

If you like lending money to a government or company at an agreed interest rate for a certain amount of time, invest in bonds. In return, the borrower promises to pay you interest income at regular intervals and repay your capital or loan at the end of the agreed term.

Bonds can range from safe to risky. You also need to check the bond ratings, if any before you invest.

Bonds have a face value, which is the amount you will get back at maturity, and a coupon amount, which is the regular interest income paid to you. If you sell the bond before the agreed maturity date, you will be quoted a sale price.

Bonds are not generally designed to give you capital growth. You normally get a regular income and a higher interest rate that may be available in a term deposit or other cash-based product.

The main risk of corporate bonds is that the company might not be able to pay the interest or repay the loan when it is due because the company issuing the bonds might go out of business prior to maturity date.

A corporate bond is not the same as a company share. If you buy shares in a company, you have a legal ownership and interest in the company.

If you buy corporate bonds, you are only lending money to the company issuing the bonds. As a bondholder, you are considered a financier or ‘creditor’ rather than an owner or shareholder.

You buy corporate bonds through a public offer (primary market) or through a securities exchange (secondary market).

A company that makes a public bond offer will issue a written prospectus. Investors apply directly to buy bonds. Many investors find out about these offers through newspaper advertisements.

You can buy (and sell) some corporate bonds through an exchange just like you would for company shares after they have been issued in the primary market. You will pay the market price, which may be higher or lower than the face value of the bond. You will also pay transaction fees to your broker when you buy or sell bonds.

Investing in currencies

If you like the excitement of foreign currencies, you can buy and sell different types of currencies (money) on the foreign exchange (forex) market.

You can invest in foreign currencies itself, foreign currency futures, foreign currency options, exchange-traded funds (ETFs), exchange-traded notes (ETNs), foreign currency Certificates of Deposit (CDs), and foreign bond funds.

The forex market is a 24-hour cash market where currency exchange rates are usually quoted in currency pairs. They tell you how many units of currency you will receive based on the currency you want to sell. For example, a USD/EUR quote of .91 means that you’ll receive 0.91 euros for every US dollar you sell.

Because foreign currencies are traded in pairs, investors and traders are essentially speculating that one currency will go up and the other will go down. These foreign currencies are bought and sold according to the current price or exchange rate traded on that day.

Like shares, convert your currencies into those you want to invest in and use a currency exchange broker to place your foreign currency transaction.

Investing in options

If you like to hedge your investments, invest in options.

An option is a contract and a financial instrument that can be used effectively under almost every market condition and for almost every investment goal.

There are two kinds of options: calls and puts. Call options give you the right to buy the underlying asset. Put options give you the right to sell the underlying asset.

When you buy an option, you do not buy the underlying asset (real estate, shares, etc.). You acquire the right (but not the obligation) to buy the specified underlying asset at a given or agreed price in the future.

Like a company stock, an option is a security. There’s a right to ownership of the underlying asset.

Unlike a company stock, an option is a derivative. It derives its value from an underlying asset.

Options offer flexibility, diversification, and a certain amount of protection against loss for a fairly inexpensive cost. Even if you lose money, you cannot lose more than the premium paid or the price of the option paid. On the other hand, your potential for profit has no limit.

An option fee is charged upfront by the seller of the option even if the buyer decides not to use or exercise the option. They are based on a number of factors including volatility, security price, and time value.

As an example, you want to buy a house. Unfortunately, you don’t have enough money for the down payment for another six months. Your approach the owner of the house and negotiate an option to buy the house within six months for $100,000. The current market value of the house is $95,000. The owner agrees to sell you an option to buy the house for an option or premium fee of $1,000. Real estate options are generally 1% of the price of real estate.

One scenario is that the property market took a downturn and the house value drops to $85,000. You decide not to exercise the option to buy the house and you only lost a $1,000 fee paid for the option to the owner of the property.

The other scenario is that during the six-month period, the property market improved and the price of the house shoots up to $150,000. Legally bound by the option contract, the owner is obligated to sell the house to you for $100,000. The total cost to you is only $101,000.

You may decide to resell or flip the house for $150,000, making a profit of $49,000.

Peer-to-peer money lending

If you have excess cash lying around and want to lend your money to other people where you are the bank, you can make money from the interest repayments.

Private ‘peer-to-peer’ lending is the future of banking. It cuts out the middle-man (e.g., banks), passing on higher interest rates to you and cheaper loans to borrowers. It’s all managed online from the comfort of your sofa.

Noting that there are risks attached with peer-to-peer lending, websites like Harmoney, LendingClub, Propser, and Zopa have created a new industry where you can invest your money and become a lender. You are matched to a consumer who either prefers peer-to-peer lending or has trouble securing a loan from a bank. You can earn higher interest rates on the loans you issued since you’re dealing directly with the borrower.

Investing in commodities

If you like commodities, you could invest in a range of commodities like agricultural (wheat, corn, soy), metals (gold, silver, copper), and energy (crude, natural gas, heating oil). You make (and lose) money trading commodities by taking advantage of price movements.

The commodities market is a very risky place to invest your money with potentially large gains balanced by equally large potential losses.

Generally, you transact through a registered broker within a licensed brooking company or business when you want to buy and sell your interest. You set up a trading account with your nominated broker and transfer enough funds into that account to cover your purchases, brokerages, and fees.

Investing in precious metals

If you like commodities like gold and silver, you can buy and store gold on your own as an investment in a safe deposit box.

This introduces additional costs of secure storage and shipping.

One way to reduce your costs in trading precious metals is to use a remote gold dealing and storage services. Several bullion firms offer online trading and safe storage of precious metals.

Visit websites like Dillon Gage, Fideli Trade, Hard Assets Alliance, Rare Coins, and Sprott Money and seek professional advice prior to investing in precious metals.

Investing in commodity futures

If you like trading in commodity futures in the futures market, you can trade contracts to buy or sell a commodity at a set date in the future for a set price. In doing so, you carry a large amount of risk due to uncertainties of price movements.

These securities are often highly leveraged using borrowed money to increase earning potential. A small change in the price of the commodity can result in massive losses (sometimes even more than your initial deposit) or massive gains.

In many cases, commodity futures trading is best left to professional traders and large corporations.

Investing in commodity-related shares

If you want to invest in oil, you could buy stock or shares in companies that drill, search for, transport, or sell oil.

You buy shares related to certain commodities. It’s an indirect way to bet on the value of a commodity without incurring all of the risks of commodity futures trading. These shares, while correlated with commodity prices, may not move directly with them.