How to make money and where to invest, How to Invest Money
The Contrarian Way—Blood in the Streets Even the most unadventurous investor knows that there comes a time when you must buy, not because everyone is getting in on a good thing but because everyone is getting out. Just as great athletes go through slumps when many fans turn their backs, the stock prices of otherwise great companies occasionally go through slumps, which accelerate as fickle investors bail out.
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As Baron Rothschild supposedly once said, smart investors "buy when there is blood in the streets, even if the blood is their own. The point is that there are times when good investments become oversold, which present a buying opportunity for investors who have done their homework.
The classic barometers used to gauge whether a stock may be oversold are the company's price-to-earnings ratio and book value. Both measures have well-established historical norms for both the broad markets and for specific industries.
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When companies slip well below these historical averages for superficial or systemic reasons, smart investors smell an opportunity to double their money. The Safe Way Just as the fast lane and the slow lane on the highway eventually will get you to the same place, there are quick and slow ways to double your money.
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- Every time.
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If you prefer to play it safe, bonds can be a less hair-raising journey to the same destination. Consider zero-coupon bondsincluding classic U. For the uninitiated, zero-coupon bonds may sound intimidating. In reality, they're simple to understand. Instead of purchasing a bond that rewards you with a regular interest payment, you buy a bond at a discount to its eventual value at maturity. As it moves closer and closer to maturity, its value slowly climbs until the bondholder is eventually repaid the face amount.
One hidden benefit is the absence of reinvestment risk. With standard coupon bonds, there are the challenges and risks of reinvesting the interest payments as they're received.
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With zero coupon bonds, there's only one payoff, and it comes when the bond matures. The Speculative Way While slow and steady might work for some investors, others find themselves falling asleep at the wheel. For these folks, the fastest ways to super-size the nest egg may be the use of options, margin trading or penny stocks. All can super-shrink a nest egg just as quickly.
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Stock options, such as simple puts and callscan be used to speculate on any company's stock. For many investors, especially those who have their finger on the pulse of a specific industry, options can turbo-charge a portfolio's performance. Each stock option potentially represents shares of stock. That means a company's price might need to increase only a small percentage for an investor to hit one out of the park.
Just be careful, and be sure to do your homework before trying it.
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For those who don't want to learn the ins and outs of options but do want to leverage their faith or doubts about a particular stock, there's the option of buying on margin or selling a stock short. Both of these methods allow investors to essentially borrow money from a brokerage house to buy or sell more shares than they actually have, which in turn raises their potential profits substantially. This method is not for the faint-hearted. A margin call can back you into a corner, and short-selling can generate infinite losses.
Lastly, extreme bargain hunting can turn pennies into dollars. You can roll the dice on one of the numerous former blue chip companies that have sunk to less than a dollar. Or, you can sink some money into a company that looks like the next big thing. Penny stocks can double your money in a single trading day.
Just keep in mind that the low prices of these stocks how to make money and where to invest the sentiment of most investors.
The Best Way While how to make money and where to invest not nearly as fun as watching your favorite stock on the evening news, the undisputed heavyweight champ is an employer's matching contribution in a k or another employer-sponsored retirement plan.
Making it even better is the fact that the money going into your plan comes right off the top of what your employer reports to the IRS.
You won't get a company match, but the tax benefit alone is substantial. A traditional IRA has the same immediate tax benefit as a k. A Roth IRA is taxed in the year the money is invested, but when it's withdrawn at retirement no taxes are due on the principal or the profits. But if you're young, think about that Roth IRA. Zero taxes on your capital gains? That's an easy way to get a higher effective return. If your current income is low, the government will even effectively match some portion of your retirement savings.
Be suspicious whenever you're promised results. Whether it's your broker, your brother-in-law or a late-night infomercial, take the time to make sure that someone is not using you to double their money.
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