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Various financial markets and investment vehicles offer a tempting menu for the active investor who enjoys doing his or her own research and decision making. Or you can pay someone else to make the decisions for you, but this will lower your potential rewards while retaining at least some of the risk.
Let’s suppose you have exactly $1,000 and want to make an investment in the financial markets. Determining how to invest your money is an important and, as discussed, often times confusing decision. What do you do? Should you invest $1,000 in stocks, futures, options or a combination?
So, what’s the best way to invest $1,000 today? With so many ways to invest these days, it can be difficult knowing which is the right course of action for you and your hard-earned money. Here, we’ll look at 10 options for how to invest your money.
1. Buy Hedge Funds
Hedge fund managers try to outsmart the markets in order to justify high management fees. Unfortunately, they’ve been generally unsuccessful in recent years. Warren Buffett made a well-publicized bet as to which would appreciate faster over 10 years—a basket of mutual funds or an index fund that just tracks the market—and the index fund won.
Note: to buy hedge funds directly you need to be an “accredited investor” with a high net worth. Requirements for hedged mutual funds are much less stringent. But just because you can buy them doesn’t mean you should.
2. Give your money to a paid advisor or full-commission broker
An advisor will charge you a fee, or a commission, sometimes both, to manage your cash. And they may make investments that are in their best interests, instead of yours, because they pay high commissions or are promoted by their companies. Plus by going this route, instead of doing your own research, you’ve lost money before you even get started. Fortunately you’re not likely to find an advisor who will take you on for $1000.
3. Buy a Certificate of Deposit (CD)
Maybe it’s unfair to rate this traditionally conservative strategy as a bad investment on our list. But the fact is, at today’s returns, you’re almost guaranteed to lose money. If inflation is 2% and your CD pays at best 1.5%, it isn’t hard to figure out that you’ll be in worse shape when it matures. Plus, you won’t have access to the money in the meantime, so you’ll be out even more in missed opportunity if interest rates go up (which, economists universally agree, they will; the only question is when).
4. Buy Penny Stocks
When determining how to invest in stocks, some people think penny stocks make sense. $1,000 would seem to go a long way when buying stocks that are priced at less than a dollar. The attraction to penny stocks is that a) since they’re so cheap, there is no place to go but up and b) since the price is so low, you can buy lots of different stocks and you’re sure to find some winners.
Unfortunately, there’s a reason penny stocks are priced so low. They are either obscure, thinly-traded (and near impossible to liquidate) companies or companies that have fallen far down on their luck. And they can still get cheaper—until their value is zero. These are just a few of the reasons to to stay away from penny stocks.
5. Hire a Robo-Advisor
Robo-advisors appear to be an attractive new alternative for beginning investors or those with limited capital. You choose an investing profile (which will combine your acceptable degree of risk and the timeframe for your investing), and a computer algorithm works on your behalf to make the best investments for your needs and adjust them as conditions change in the financial markets. Fees are much lower than for traditional advisors, and can be waived entirely once your portfolio reaches a certain size.
The drawbacks of robo-funds are the same as the benefits, however: you don’t actually see how the funds are invested, and you usually can’t turn to a live human if you need advice. And the biggest decision of all—which of the increasing number of robo-funds to invest in—is still up to you.
6. Trade Futures
Through the power of leverage, your $1,000 might control a futures contract worth as much as $15,000 or more. However, your broker might require you to have additional cash available for margin calls, and if a trade goes south you could lose your entire stake and more. OTA’s Don Dawson wrote a thoughtful piece in Lessons From the Pros with advice on trading very small futures accounts. It can be done, but until you learn how to invest in futures contracts the risks probably exceed the potential rewards.
7. Trade Forex
Like futures, Forex Trading (also known as FX or foreign currency trading) has a low price of entry; some online brokers will open a “mini” account with a deposit of $100 or less. Forex is also an appealing asset class because it’s relatively simple to understand: most of the action is concentrated in just a few currency pairs. As in futures trading, you can control far more than your actual investment through leverage, but leverage can also magnify your losses.
8. Trade Options
Options Trading allows you to control a stock or other asset and capitalize on its price movement without actually owning it. Because options expire in a few months (or even weeks) they’re priced low, far below the per–share price of the underlying asset. Want to trade Tesla or Google or another expensive high-flyer? Options allow you to do that for just a few dollars. A benefit is that unlike futures, the most you can lose is your stake; there’s no threat of an additional margin call. But like futures, options are a complex (though exciting) asset class and you need training and experience to trade options successfully.
9. Buy ETFs that track market indexes
Warren Buffett advises investors to “stick to low-cost index funds” like the S&P index fund that won his hedge fund bet. You can do the “Oracle of Omaha” one better by buying Exchange Traded Funds (ETFs) that mimic the same measurements. ETFs offer a much wider choice of investments so you can find an ETF that tracks a very narrowly defined sector, if that suits your needs. And since ETFs trade like stocks, you can buy and sell throughout the day unlike mutual funds.
10. The Best Way to Invest – Don’t buy anything—until you invest in educating yourself about the markets
Many brokerages and platforms offer test accounts where you can trade with play money, the equivalent of Fantasy Football, until you become experienced with the ebb and flow of the markets and the behavior of individual ticker symbols. Or $1,000 could be used to learn how to invest in stocks and other investment courses. Online Trading Academy offers comprehensive trading and investing education for traders and investors of all levels of experience. And you can get started for FREE by attending a half-day class in your area.
As we’ve seen, there is no magic bullet investment that is going to magnify your money with no downside whatsoever. There’s always a tradeoff between acceptable risk and potential reward. The “worst” investments are those that reduce your upside—by paying somebody else a portion of your hard earned money to manage your portfolio—without doing anything to take away the risk. And the “best” investments are those that put you in control — even if you ultimately choose to have someone actually do the investing on your behalf.
Remember, nobody cares more about your money and your future than you do, so do your homework and educate yourself about the financial markets before putting your money at risk!