Trouble Areas for Investors
There are a number of temptations in the search for ever-increasing rates of return. Many times once investors become comfortable with stock investments, they become increasingly concerned about finding significant rates of return. This leads them to many different investment vehicles that may not match their original financial planning goals. Some of these investment vehicles include margin accounts, selling short, speculative stocks, options, shelters, oil and gas stocks, IPOs, futures and day trading.
While all of these are viable investment vehicles for the right investor, most of these are not viable investment vehicles for the average investor. Therefore, most have a considerable amount of risk involved with each purchase. Additionally, each type of investment vehicle in this category, usually requires a significant amount of research to determine which investment vehicles might provide the best returns for each investor.
Therefore, it is advisable to remember your investment and financial planning goals, before deciding to make a purchase outside of the normal stock area, if you are investing stocks as an investment vehicle.
The purpose of this web-site is financial planning, but a brief description of each of these danger areas may help an investor to avoid a significant investment error. Margin accounts, are those accounts where one can trade i.e. buy additional stocks with money which is not in their account. This means, in effect, that a person is procuring a loan from the stock brokerage firm. This is all well and good when the stock increases in price, it is sold for a profit, and the loan is repaid. However, the danger is that often, the stock either does not increase in value or actually loses value, and the loan becomes a liability, instead of an asset. Selling short is one of the vehicles by which an informed investor can determine what the stock price might be in the future and purchase certain investment vehicle and in effect, gamble on the stock price to be higher or lower in the future. Often times, without the requisite research and knowledge of the particular company or stock, it is nothing more then a gamble. Speculative stocks are typically stocks that can have no prior history in the stock market or stocks which may be spin off of companies looking to rid themselves of certain portfolios. These speculative stocks may not be bad investments, in fact often can be very lucrative investments. The problem again is that without a tremendous amount of research and knowledge concerning the stock in the industry and other factors related there to, the purchase of a speculative stock may be nothing more then a gamble, not an investment. Real estate, shelters, and oil and gas equities, can all be very speculative, and are all tied to certain industries at times. Oil, gas and real estate tax shelters have all seen periods of time in which their investments became worthless.
A new form of investment has become very popular in the last decade are IPOís. These are usually initial public offerings, although there is also a version of IPOís called an initial private offering. Initial public offering, these are usually smaller companies that may have some attractive element and are looking to grow by having average investors purchase shares in the company. The problem is that often times, the original creators of the stock or company wish to sell their ownership interest as soon as the stock becomes a public holding. How many companies would you buy if you knew that the ownership of the company that had built that company was selling the day after you had bought their stock?
Many IPOs have been great investment vehicles. However there are a number of failed IPOs that seemed like good ideas prior to the date of purchase. Extreme caution should be exercised in this area, since the temptation can be significant to ordinary investors. Futures for commodities as an entire industry, and has a high degree of risk. These should be avoided except by the most astute investor, as, in addition to the risks, fraud seems to permeate parts of that industry.
Although investing in your own company has a certain element of risk to it. After all, itís through the fruits of your own labors and those of your colleagues, it gives your company its value in many aspects. Also, you know as well as many other employees, the financial condition of your company often can predict the financial future of your company. It can either be a positive future or a negative future, but in either case, you may be better poised to invest or not invest in your companyís stock. Years passed, company stock was the major form of investment for retirement accounts. Recently, there is a trend away from "putting all of your eggs in one basket", and while the company's stock may be one investment vehicle, it may not be the only investment vehicle for wise investors.