I have come to expect a few things about "security investing": Bonds move opposite from stocks, the majority of investors are better off purchasing index funds, and stockbrokers just don't understand how futures work.
This is the typical dialogue of an investor and his stockbroker: Stockbroker: Good morning, Bob! Glad to see you again.
How may I help you today? Investor: Well, Mr.
Smith, I have squirreled away some extra money, and I want to invest in futures or forex.
Stockbroker: Why would you want to do that? Investor: Well, I heard that there was a lot of opportunity, and I have seen gold triple in value over the last few years.
Stockbroker: Listen to me, Bob.
Is it okay if I call you Bob? Listen, Bob, forget about it.
Gold, schmold, what you need is some sound investment advice.
Remember that gold stock I got you into last year? Investor: Yeah, it's down 30%.
Stockbroker: Bob, remember, we're in it for the long haul.
Buy and hold, buy and hold.
In fact, since it's cheaper, we need to buy more.
We buy more now, we can make up for that 30% loss that much quicker.
Investor: Well...
I guess.
Stockbroker: Bob, let's look at the big picture.
The price is cheap for this and a few other gold-mining companies.
If the price of gold is going up, we need to get some more of these other companies in your portfolio while it's still low.
Bob, are you listening to me? Investor: I hear you.
If you think this is the best way.
Stockbroker: Of course, I think this is the best way.
Who in their right mind would want to buy and sell actual gold? It's too risky.
Investor: The gold-mining companies do it, right? Stockbroker: Exactly, Bob, so don't waste your time.
This is the typical exchange between an investor and his stockbroker.
While the investor may see the logic of skipping the middleman and buying the actual gold, the stockbroker can't or won't.
Often, the reason they can't see the logic is that they are simply not licensed or trained to give their clients advice about futures and forex investing.
Futures and Forex Investing Is Not New In later chapters we will go in depth on the origins of futures and forex, but to suffice it to say that various forms of futures contracts have been around for hundreds of years.
The current forex environment, while fairly new, is patterned, in many ways, after the futures market contracts.
So let's define a futures contract: A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.
(Investopedia.
com) The forex market is defined as: The foreign exchange (also known as "forex" or "FX") market is the place where currencies are traded.
The overall forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.
9 trillion per day and includes all of the currencies in the world.
(Investopedia.
com) Forex contracts are similar to futures contracts: You put up a small margin, and the currency contracts have a default standard size.
The key difference between forex and futures is that forex has no centralized marketplace, and while futures contracts can be extended out months at a time, forex contracts are known as spot contracts and are on a 24-hour cycle.
Futures and forex investments are technically called alternative investments.
They are outside the normal range of typical investor experience-stocks and bonds.
The mistake that many investors make is that they feel as if they have to choose between their normal stock investing and these alternative investments.
This is not the case.
A simple approach to these investments can be taken that can incorporate them into your overall portfolio without threatening your overall portfolio security.
What You Don't Know Can Hurt You After being involved with the futures business for the past 14 years, I have seen few stockbrokers who have known anything about investing in futures and forex.
In fact, only a handful of stockbrokers hold the proper licensing required to sell or buy futures and forex investments in the first place.
Of those few, even fewer build their practice around the actual selling of futures and forex investments.
That being said, the majority of stockbrokers do have their client's best interest at heart.
So they apply various platitudes that they have learned in developing a working set of rules to get thorough stock investing.
This working knowledge has helped them succeed and thrive over the years in helping their clients survive the stock market.
The question becomes: Can the wisdom of stock market investing be applied to futures and forex investing? If it can, why haven't you been taught? If it can't, what is stopping it? While there are numerous ideas and concepts about stock investing, there are five concepts that stick out like sore thumbs: 1.
Buy and hold 2.
Dollar cost averaging 3.
Value investing 4.
Portfolio diversification 5.
Margin We are going to look at these concepts and see how they can be beneficial when you invest in stocks but may not translate well into future and forex investing.
We will also look at how these concepts may be reworked to apply to futures and forex investing.
This is the typical dialogue of an investor and his stockbroker: Stockbroker: Good morning, Bob! Glad to see you again.
How may I help you today? Investor: Well, Mr.
Smith, I have squirreled away some extra money, and I want to invest in futures or forex.
Stockbroker: Why would you want to do that? Investor: Well, I heard that there was a lot of opportunity, and I have seen gold triple in value over the last few years.
Stockbroker: Listen to me, Bob.
Is it okay if I call you Bob? Listen, Bob, forget about it.
Gold, schmold, what you need is some sound investment advice.
Remember that gold stock I got you into last year? Investor: Yeah, it's down 30%.
Stockbroker: Bob, remember, we're in it for the long haul.
Buy and hold, buy and hold.
In fact, since it's cheaper, we need to buy more.
We buy more now, we can make up for that 30% loss that much quicker.
Investor: Well...
I guess.
Stockbroker: Bob, let's look at the big picture.
The price is cheap for this and a few other gold-mining companies.
If the price of gold is going up, we need to get some more of these other companies in your portfolio while it's still low.
Bob, are you listening to me? Investor: I hear you.
If you think this is the best way.
Stockbroker: Of course, I think this is the best way.
Who in their right mind would want to buy and sell actual gold? It's too risky.
Investor: The gold-mining companies do it, right? Stockbroker: Exactly, Bob, so don't waste your time.
This is the typical exchange between an investor and his stockbroker.
While the investor may see the logic of skipping the middleman and buying the actual gold, the stockbroker can't or won't.
Often, the reason they can't see the logic is that they are simply not licensed or trained to give their clients advice about futures and forex investing.
Futures and Forex Investing Is Not New In later chapters we will go in depth on the origins of futures and forex, but to suffice it to say that various forms of futures contracts have been around for hundreds of years.
The current forex environment, while fairly new, is patterned, in many ways, after the futures market contracts.
So let's define a futures contract: A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.
(Investopedia.
com) The forex market is defined as: The foreign exchange (also known as "forex" or "FX") market is the place where currencies are traded.
The overall forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.
9 trillion per day and includes all of the currencies in the world.
(Investopedia.
com) Forex contracts are similar to futures contracts: You put up a small margin, and the currency contracts have a default standard size.
The key difference between forex and futures is that forex has no centralized marketplace, and while futures contracts can be extended out months at a time, forex contracts are known as spot contracts and are on a 24-hour cycle.
Futures and forex investments are technically called alternative investments.
They are outside the normal range of typical investor experience-stocks and bonds.
The mistake that many investors make is that they feel as if they have to choose between their normal stock investing and these alternative investments.
This is not the case.
A simple approach to these investments can be taken that can incorporate them into your overall portfolio without threatening your overall portfolio security.
What You Don't Know Can Hurt You After being involved with the futures business for the past 14 years, I have seen few stockbrokers who have known anything about investing in futures and forex.
In fact, only a handful of stockbrokers hold the proper licensing required to sell or buy futures and forex investments in the first place.
Of those few, even fewer build their practice around the actual selling of futures and forex investments.
That being said, the majority of stockbrokers do have their client's best interest at heart.
So they apply various platitudes that they have learned in developing a working set of rules to get thorough stock investing.
This working knowledge has helped them succeed and thrive over the years in helping their clients survive the stock market.
The question becomes: Can the wisdom of stock market investing be applied to futures and forex investing? If it can, why haven't you been taught? If it can't, what is stopping it? While there are numerous ideas and concepts about stock investing, there are five concepts that stick out like sore thumbs: 1.
Buy and hold 2.
Dollar cost averaging 3.
Value investing 4.
Portfolio diversification 5.
Margin We are going to look at these concepts and see how they can be beneficial when you invest in stocks but may not translate well into future and forex investing.
We will also look at how these concepts may be reworked to apply to futures and forex investing.