High tech stock trading, particularly with “penny stocks” from unknown or less well-known companies is a highly volatile area of the market, yet one with immense earning potential if you can spot the next big thing.  While this may be true of any area of the market, if you know what to look for, knowledge of the high tech sector offers some unique opportunities to spot undervalued stock.

Watch the cycles

Watching the cycles of an individual company or specific sector of the market, is one of the most important ways to spot undervalues stock in any area of the market, and a keystone to making a profit swing trading. Stock in the high tech industry can be much more unstable than in more established businesses, such as manufacturing, because the pace of innovation creates high demand among consumers and businesses who want the latest technology in a world where a two year old system or device is obsolete.

This is further exacerbated by the fact that when economic times are hard, high tech goods and services are viewed as non-essential purchases or investments, but as soon as things pick up, the public is keen to spend their money on shiny high tech baubles. The upshot of this is that the price of high tech stock rises and falls quicker than in other industries, which means there is plenty opportunity for the canny investor to take advantage, and grab stock on the low swing.

Search Patent Registries

One way to find undervalued companies is to scour patent registries for promising new inventions that small, so far unrecognized companies have filed for. Patents held by small businesses, which may be picked up by large scale technology companies for serious sums of money, are often overlooked by investors when assessing their worth. Spotting companies that have innovative patent filings, with future market potential, before major companies offer them a contract and therefore alert other investors, is a great way to find stock that will soon appreciate (often dramatically.)

Pay attention to companies with a high price-to-earnings ratio

Traditionally, investors will tend to dismiss companies with a high price-to earnings ratio, as this is seen as an unfavorable indicator of a company’s profitability potential. High-tech stocks however, often buck this trend, as the high price-to-earnings ratio reflects that the company working towards a goal or breakthrough, that once achieved causes the share price to shoot up.

Conclusion

Buying high tech stocks can be a very sound investment strategy and blue chip stocks (e.g. Microsoft (NASDAQ: MSFT) certainly, given the likelihood of their long term appreciation, make an excellent addition to any long term investment portfolio.

Trading in high tech penny stocks is a much riskier venture (as is all such trading), but the potential pay-off can be sky high. A thorough knowledge of the tech industry is essential here however, as you need to be able to spot potential in unknown and unrecognized companies, often with little or no track record or earnings before they “make good.”

By Douglas Crawford.

High tech stocks are shares in public traded companies that specialize in the manufacture or development of high tech devices and their components, or of software solutions. Thanks to the very high consumer profile and consequent demand for high tech gadgets, such as smart-phones and tablets, over last year, interest in investing in high tech stocks has rarely been so high.

The problem is that, in large part due to the collapse of the dot-com bubble in the early 2000’s, the received wisdom is that tech stocks are a bad investment. In some regards this is borne out by the spectacular failure of companies that were once household names, such as Research In Motion (RIM, makers of Blackberry phones) and HP, but to balance this out investors in Apple have made 1000% profits, and during 2011 the technology section of Standard & Poor’s 500-stock index traded at thirteen times its estimated value, a trend that has continues throughout 2012.

Whatever the future holds, there is little doubt that technology will be at the forefront of any upcoming human endeavors and, despite its reputation for volatility, large sectors of the technology industry have seen no greater price fluctuations than the rest of the S&P index, and as a sector it holds 15% ($360 billion) of its market value in cash and equivalents, a figure unequalled in any other sector.

An interesting factor with many technology companies, particularly those dealing with business system such as Oracle (Nasdaq:ORCL), which manages the day-to-day software and databases of some of the world’s largest companies, is that they are “embedded” in the businesses to the point that they could get rid of them even if they wanted to.  Apple is interesting here, as consumer oriented technology does not usually have this level of indispensability, but with its tightly controlled ecosystem, Apple is in the position that a great many of its customers would find the idea of switching to another companies’ products very painful.

Buying blue-chip high tech stops is therefore a sensible investment in a long term portfolio, where any short term volatility can be off-set against long term growth potential. However, for investors wanting increased their returns, buying undervalued is a risky but potentially highly rewarding strategy, which we discuss here.

By Douglas Crawford.

Buying stocks in large well, established companies that have built up a good reputation among the public, and who are in many cases a household name, is great way to help ensure your portfolio has above average results. Such companies are said to have a high franchise value (as a great many of them are indeed franchises,) and they are generally quite easy to spot by asking the following questions:

1. Are people willing to pay more for the product than for a generic brand?
2. Are people willing to travel further just to obtain that particular brand?
3. If a new company opened in competition to it, would it have any chance of success?

Some companies, such as Hoover or Coke have such a high franchise value attached to them that their very brand name is often used generically to refer whole product niches. Thanks to strong consumer demand, companies with a high franchise value can sell their products at a premium that lesser known competitors cannot match. This allows them to absorb any increase in cost due to inflation, increased labor or increased production costs, and even, as has recently been the case with Amazon and their Kindle Fire tablet, sell products at a loss in order to undercut their competition.

Of course, the problem with making a profit by investing in such high franchise value stock is that it costs a lot as an initial investment. However, these stocks are worth paying up to their intrinsic value for, as their price is almost certain to go up in the long term (although to pay more moves into the riskier realm of speculative investment).  The problem is that there are over 14,000 publically traded companies in the U.S, so how do you choose which one to invest in?

On the basis that franchises represent some of the best known brand names in the country (i.e. they have very high franchise values), here are some details about the top 3 publically traded companies out of the top 20 franchises picked by Forbes (Levi Davis and Maureen Farrell, Jan 2011)in its round-up of the best franchises to invest in.

3. Panera Bread

This popular bakery and bakery-café chain which sells, fresh bread, bagels, muffins, sandwiches, salad, soups and coffee, has its headquarters in Sunset Hill, Missouri and operates or franchises 1500 cafes and 20 delivery-only bakeries across the U.S. It has been named North America’s healthiest fast casual restaurant (Health magazine 2005) and most popular restaurant for eating on the go (Zaget 2009).

Traded as NASDAQ: PNRA

2. Papa Johns

The third largest pizza take-out and delivery chain in the U.S, Papa Johns runs over 4000 pizza joints worldwide, and 2,600 the U.S. Notable for being the first national pizza chain to allow ordering online to all its U.S customers, Papa Johns connects all its retail and management locations via advanced fiber-optic network, and is the official NFL supplier if pizza.

Traded as NASDAQ: PZZA

1. McDonalds

The largest fast food hamburger chain in the world needs no introduction. Stared in 1940, there are now over 31,000 restaurants across the world, serving 58 million customers every day. For the last 25 years McDonalds has increased its shareholder dividends every year (making it an S&P 500 Dividend Aristocrat), although in October 2012 its sales fell for the first time in 9 years.

Traded as NYSE: MCD

Conclusion

Of course there are many other well-known, high franchise value companies out there that have nothing to do with actual franchising (e.g. Microsoft and Amazon), but the above are good, consistently well performing companies, which if you if you buy shares in at no more than their intrinsic worth, are almost guaranteed to be a profitable long term investment.

By Douglas Crwaford.

People like to invest in gold as it is seen as a great way of preserving value in uncertain economic and political times, which is why it is so popular now. Over the last 10 years gold has increased in value by more than 400%, a trend that looks set  to continue thanks to the strong domestic demand for gold in China and India, although it should be warned that outside of this 10 year period gold have not done so well.

Pros to investing in Gold

1. For the last 10 years there has been a major appreciation in the price of gold (more than 400%)
2. The U.S dollar is weak and shows no sign of becoming any stronger in the foreseeable future. This is linked to a projected downturn in the U.S economy fed by large scale public spending by the government, and large increases in the federal deficit. The over $2 trillion of debt owed to foreign investors by U.S businesses can only exacerbate this problem.  A fall in the value of the dollar means that alternative investments (such as gold) will be worth more
3. Thanks to emerging markets’ (such as China and India) increasing desire for gold as their economies become wealthier, demand for gold is high. That global demand for gold is higher than the amount being produced can only increase its value
4. The price of gold is currently appreciating at a greater rate than any interest rates lost by not being paid on savings
5. The price of gold is still climbing

Cons of investing in gold

1. The high current price of gold, and the appreciation of gold stocks  over the last 10 years is historically unusual
2. You do not get paid interest or income on gold (although you also pay no tax)
3. Although gold stocks are still appreciating in value, this has begun to slow down

There are a number of different ways to invest in gold, including simply buying physical bullion, and buying shares in gold mining companies. However, gold funds provides a much more diversified investment portfolio, so that is what we shall look at here.

Gold mutual funds

Gold mutual funds are sometimes referred to as Gold Mining Funds since that is, in effect, what they usually are. They seek to make a profit from gold indirectly by investing in gold mining company stocks. The advantage of being a part of a mutual fund that invests in a variety of different mining companies, rather than being an individual investor in one company, is that you are afforded a degree of protection from poor performance due to bad management and political considerations etc. in any one mining company, by virtue of having some degree of diversification.

Gold stock is considered leveraged play, as the value of gold stock can go up and down much faster than the  value of the underlying gold;

Example: It costs $500 to mine an ounce of gold (say), so when the price of gold is $700/oz, the profit is $200. If the price of gold goes up to $800 for a $300 dollar profit, then that means there is a 50% increase in profit for an 11.4% change in the price of gold.

The problem with this is that it works both ways, making gold stocks (and therefor gold mutual funds) much more volatile (i. e. potentially more profitable but also potential riskier) than investing directly in gold bullion.

Mutual funds offer the advantage that as an individual investor, after paying for the initial investment (typically $1000 to $3000), you can continue to pay into the investment in small, regular amounts but as they are actively managed, the fees associated with such management can be quite high, and if a lot of trading is performed the transaction fees will be passed on the individual investors. Mutual funds, as they are investment in shares, are liable to capital gains tax, unlike physical gold which is not taxed.

Gold exchange traded funds

Gold ETFs are effectively buying shares in gold bullion, usually physically held and secured by a large multinational corporation.  As such it is a way for individuals without huge bank balances to invest directly in gold, although some ETF investment are in gold futures instead (or are a combination of the two). In the U.S there are only two gold exchange traded funds (the streetTRACKS Gold Trust and the iShares COMEX Gold Trust), which both hold gold bullion as their 100% asset.

Gold exchange traded funds can be bought and sold as easily as any security, but thanks to being based on physical gold, tend to smooth out fluctuations in market prices, although they are as susceptible as any security to overall market conditions.

The biggest problem with gold exchange traded funds is that you are not actually owning gold, just a bit of paper saying you own gold (hence the name paper gold), and there is no guarantee the gold is actually being bought and stored, or that the value of the shares equals that of the stored gold, as there is no mandatory auditing system in place. It should also be remembered that although management fees are generally lower than for mutual funds thanks to being ETFs being passively managed, they still exist.

So which is best?

There really is no right answer as it all depends on your investment strategy. Investing in a gold mutual fund is a great way to diversify your overall investment portfolio and by diversifying within the gold mining industry should provide some protection when individual companies run into trouble. Gold EFT’s on the other hand, are in some ways a safer bet as you are investing directly in gold bullion, but bring with them their own risks.

By Douglas Crawford.

Penny stocks, i.e. stocks that trade for less than $5 per share (also known as micro-cap equities), are famous for their high volatility and the number of scams associated with them. Trading in them does however offer a number of distinct advantages:

1. Their low cost means that for many they are the only opportunity they will have to “get in on the ground floor”, and invest in something that may become very big
2. Their volatility means that fortunes have been made as their prices rocket to hundreds of times their initial value
3. With sensible investment their low cost makes them an ideal way to practice stock trading with relatively low risk to the investor
4. Trading in penny stocks can be fun, as their high volatility makes them exciting, and their low price makes it easy for even small investors to make a profit

Penny stock volatility

The low value of the companies’ that penny stocks represent makes them easy prey to manipulation by more powerful (i.e. wealthy) small organizations and individuals. In addition to this, their low value makes it easy for surges in trading activity to occur that lead inexperienced traders to wildly misjudging the value of shares. All this results in the penny stock market being a highly volatile one, even before its susceptibility to scams is factored in, to the point that investing in penny stocks often likened to gambling. Of course, as with gambling, there is plenty of opportunity to make lots of money out of such volatility, and many people have done so.

Penny stock scams

The penny stock market is notorious for the number of scams associated with it, the most prevalent being “pump-and-dump” and “chop-stock” schemes. As a trader it is the pump and dump schemes that are the most dangerous, where unscrupulous traders buy a large number of low value stocks, and then launch a campaign to promote these stocks using targeted email advertising, stock trading websites, free signals newsletters, message boards and press releases to artificially drive up interest in the stock. They then dump their purchased stocks into the overvalued market and walk away with the money as the value of the stocks consequently tumbles, leaving all the investors who bought the overpriced stock out of pocket.

Making money with penny stocks

Despite the pitfalls, it is possible to make a great deal of money out of penny stocks. While a combination of traditional fundamental analysis and technical analysis is always a solid foundation upon to base any investment, in the fast paced world of penny stock trading it always helps to have coaching, hints, tips and signal analysis from experienced professionals who know what they are doing. Unfortunately, this is precisely the field in which scammers ply their unscrupulous trade, seeding false information and promoting worthless stocks for their own gain. So the question becomes,” how do I know who to listen to?” and Profit.ly attempts to provide an answer.

Profit.ly

Profit.ly was set up in 2010 by brash and maverick short sell trader Timothy Sykes, with the aim of introducing transparency into the world of online trading.

The idea is that traders can post trades they have done onto the site, so they can demonstrate that they have a track record of making successful trades. A useful tool for self-analysis and to learn how other traders are doing, and how they make money, Profit.ly really comes into its own for giving verifiable credentials to those wishing to offer coaching and stock signal tips in forums and chat rooms etc.

The biggest drawback of the site is that traders can “cherry-pick” the trades they disclose, and so are likely to only disclose successful trades.  This is in part addressed by the “Most Madoff Traders” leaderboard. Profit.ly users can express doubt at any trade disclosed to the web site by clicking a trader’s “Madoff button” (the face of famous Ponzi schemer Bernie Madoff), with the most clicked on traders appearing on a “leaderboard of shame” from which they can remove themselves by verifying the deal (with secure transfer of information from their brokers).

So… are Profit.ly penny stock signals a scam?

Profit.ly cannot guarantee that any stock signals or investment tips given by one of its members is not a scam, but by providing a level of transparency that is not otherwise available, it is a very useful tool in assessing the past performance of the traders who offer such information. It is a long way from perfect, but if any individual you meet in chat rooms or forums etc.,  who promotes investment in penny shares cannot link to a Profit.ly profile that demonstrates a history of successful trading, then their advice is probably best avoided.

By Douglas Crawford.

Swing trading, where you trade stocks over a time scale of a few days to a few weeks, is perhaps the most popular activity performed using online stock brokers. It is much more exciting than making long term investments that may last for years, yet does not require the level of high adrenaline immersion and skill required to make profits as a day trader. In fact, it is ideal for the home or independent trader, as you do not have competition from large institutions as they cannot move quickly enough into and out of stocks to make this form of trading viable.

Remember though that it is very easy to lose money in this way (the oft quoted figure is 80% of swing traders lose money when they start trading), so practice a lot beforehand using a virtual trading account, and when you start using real money keep it to small trades until you have built up your confidence and skills.

Use technical analysis

Fundamental analysis tells you what to buy, while technical analysis, where you study charts of share prices to discern market trends and price patterns, tells you when to buy, and is the bedrock of swing (and all short term) trading. It doesn’t really matter whether or not a company has good fundamentals in this kind of trading, what matters is its short term performance in the financial market. However, a common mistake among new swing traders is to think that this is the heart swing trading, whereas any experienced swing trader will tell you that it is only the entry point and that the real key to doing well in any form of short term trading is to specialize.

Specialize

Every area of the market behaves differently, and to make money you really should become very familiar with a small sector of it.  When studying the moving point averages and chart pattern indicators across a range of business types, it might appear they are superficially very similar, but this is a mistake.  Ask an expert who specializes in say, Silicone Valley stock, and they will not only be able to immediately recognize that the chart in front of them is for such a company, but will be able to tell whether it is for Google or Microsoft.

This is because each sector of business has its own unique personality (the speed and frequency at which they spike, whether they stop at key moving averages or not, how many points they typically move etc.), and someone who has specialized in an area has a huge advantage when it comes to correctly predicting how share prices are likely to behave next.

Go for high probability gains

The trick with swing trading is to look at the likelihood of your making gains, rather than at how much you will gain. Long shots rarely work, while a series of “safe” trades, even if they only a net a small profit each, can add up to considerable profits if you make enough of them. It’s a simple numbers games really, where if you correctly identify opportunities that are in your favor and invest in many of them, you will make a profit.

Buy frequently traded stocks

The more trading there is in a stock (the higher its trading volume), the more it’s price is likely to swing and the more, therefore, the likelihood that you will be able to capitalize on that by buying on the low swing and selling on the high. This is also a great way to practice!

Keep emotional distance and use tight market stops

As a swing trader you are not emotionally involved in the welfare of the company whose shares you hold, but it is easy to hold on to stock whose price is depreciating because you do not want to take a loss. While this might be good strategy for long term “buy-and-hold” investors, as a swing trader you should cut your losses at quickly as possible and move on. The best way to do this is to set tight stop limits (around 10% to 15% is a good percentage), which not only ensures that you will never take too big a loss, but turns the process into a mechanical one, where emotion plays no part.

Watch your chosen stocks carefully

By studying the way stock cycles, how it reacts to general market trends, whether it moves with or against the market, which financial market it follows, etc. you can get to know and understand one or more stocks “personality”, and develop an instinct about how it will behave.

Conclusion

With care and diligence, it is possible to make considerable amounts of money through swing trading online, and it can serve as a great “way in” for those looking to trade on the “sharp end” and join the world of day trading.

By Douglas Crawford.

Here are some of the very best investment tips we have picked up from the likes of Warren Buffett and Jim Rogers, and which we feel represent sound investment advice. Note that this advice is aimed at investment (i.e. buy-and-hold) trading, rather than short sell trading.

Buy low

Warren Buffett, widely known as the most successful investor of the last century, famously said “be fearful when others are greedy and greedy when others are fearful”. What he meant by this was that you should avoid buying stocks that everyone else is buying (i.e. don’t buy high), as they are probably overvalued, but that you should buy stocks that are less popular (once you have performed a thorough fundamental analysis to ensure they are a solid investment) as you will be able to buy low.

Don’t spread your portfolio too thin

A diversified investment portfolio is generally regarded as a good thing as it can help cushion you from risk. However, investing in too many stocks (and other securities and assets) brings in a law of diminishing returns, and while experts disagree about the ideal number of investments you should own, more than twenty to thirty is universally considered too much. A high number of stocks can also result in a loss of focus, as it is very difficult to follow so many investments at once, and it is therefore difficult to take action quickly should you need to.

Stick with what you understand

It is easy to get carried away by advice from trusted advisers or friends, but unless you understand the business you are putting your money into, then you are investing blind. It may well be a fantastic investment opportunity, but if you don’t understand the risks involved, and cannot assess the potential rewards accurately, then it is best avoided.

Cash is best

Using margin accounts can give you leverage, but if the investment turns sour you will be in a lot of trouble, and may need to liquidate your assets to meet a margin call (see liquidity risk). Having a reserve of cash not tied up in investments means that you are in a position to meet any emergencies, and should a fantastic investment opportunity present itself, you will be in a position to exploit it. Of course, not everyone has the luxury of being able to keep quantities of cash in reserve, but if this is the case then do not invest more money than you can afford to lose.

Stay disciplined when things are good and walk away with a profit

It is all too easy to get carried away when your investment are doing well. Remember that all stock fluctuates in price, and that a downturn is at some point inevitable, so decide in advance at what point you want to exit, and stick to it. Do not be afraid to walk away once the investment level reaches a comfortable level of profit, particularly if it is two or three times what you paid for it!

Stay disciplined when things are bad and don’t panic

When your stocks fall in value, it is easy to for the emotions to hold sway over good judgment.  When investing (as opposed to making money as a short trader), you should only sell stock at a loss because there is an underlying problem with the company (i.e. with its fundamentals) as, if the investment is sound. then it will almost certainly increase in value again. In fact, a panicked market should be seen an opportunity to pick up undervalued stock at bargain-bin prices. If you really can’t bear seeing the price of your securities drop too far (or you are a short trader), you should set stop limits in advance (between 10% and 25% depending on your tolerance), as this removes the emotional aspect from the decision.

Invest in companies with good dividends

Not only are dividends a nice cash bonus in and of themselves, but regular dividend payments are a good indicator of the overall health of a company. Investing in companies with a good history of paying out and increasing dividend payments is generally considered to be a very sound investment strategy. Forbes publishes a list of “Dividend Aristocrats”, which a useful indicator of some of the most secure investment opportunities available.

Identify positive trends

Analyze the market, looking for long term upwards trends (although getting in “at the bottom” has its advantages too.) While there will almost certainly be “hiccups” along the way, investing in a company with a proven track record of appreciating stock value is always a smart move.

By Douglas Crawford.

Liquidity risk is the danger that you (or a company that you have invested in) are unable to sell an asset when you need to without taking a loss (or not making the profit you require). Some assets, for example shares in well established, consistently profitable, high franchise value companies (blue chip stock) like Google or Coca-Cola are highly liquid i.e. very easy to find a buyer for, while other assets, such as property or shares in small businesses are considered to be very illiquid i.e. it can take a considerable time to find a buyer for them. Liquidity risk can be seen as being a time factored risk, as with enough time the problem can usually be solved.

There are two main forms of liquidity risk:

Market liquidity

This is the danger that an asset you own (such as shares in a company) will be illiquid at a time when you need to sell it. That is, you may need to sell your shares to meet other financial obligations but cannot find a buyer unless you drop your selling price to the point that you make a loss (in the worst case scenarios this can lead to you selling assets at “fire sale” prices.) Market liquidity is sometimes simply a result of the seller not being able to find a buyer quickly enough, which is problem that can plague low volume markets (such as after-hours markets) and emerging markets, which are likely to see a much greater market spread i.e. difference between the price the seller wants, and the buyer is willing to pay.

Funding liquidity

This is the danger that a company will fail to meet it’s it liabilities because investors consider it to have uncertain liquidity, and will not extend lines of credit. The classic way of assessing a company’s ability to pay its short term debts is the Current Ratio formula (Current Ratio=current assets/current liabilities) or the stricter Quick Ratio/Acid-test Ratio formula (Quick Ratio=current assets-inventories/current liabilities) which excludes a company’s inventory from its current assets because inventory items can be difficult to readily turn into cash.

Steps you can take to avoid liquidity risk

1. Avoid investing in companies that may be facing a liquidity risk – this means doing your research and investigating such things as shareholder equity, long-term funding options the company has access to, and any other possible risks to the company’s health
2. Don’t buy illiquid assets unless you can afford to sit on them if things go wrong – the flip side of this however ,is that illiquid assets can offer high rates of return as investors insist on compensation for the added risk involved
3. Total debt matters less than the cash you have available – how much cash you have left over after you’ve paid your bills and debts is more important than how much money you owe in total, as it ensures you have enough to live on without selling you assets at a loss  in times of trouble.

One last aspect of liquidity risk to consider is that one person’s loss is another gain, and “vulture” investors, who can afford to buy up cheap stock and hold onto it until its value appreciates again can do very nicely out of others misfortune!

By Douglas Crawford.

Diversification is a hedging strategy that involves investing in a wide range of stocks and other investment opportunities (e.g. bonds and cash) with the aim of reducing risk. While it does not guarantee against loss, a fully diversified portfolio should help ensure that when some assets are making a loss, others are making a profit.

The key to a successful portfolio diversification strategy is to invest in lots of different assets in different asset classes, and to include international investments. There is some debate about what the optimal number  of assets to own that yield the most cost-effective results in terms of risk reduction are, ranging from  between 15 and 20 to 25 and 30, depending on which study or mathematical model is referred to, but clearly owning a broad selection of assets is a good thing.

Spread your investments across different industries

It is a good idea to invest in entirely different industries to help minimize your risk should any one area of the economy find itself in difficulty.

Spread your investments across different asset classes

An asset class is a group of securities that share similar characteristics, the main types being equities (stocks), cash equivalents (money market) and bonds, although property, commodities and other types of investment are also often included. By spreading your investments over different asset classes, you protect yourself again declining prices associated with whole sectors of the financial market.

By way of analogy, consider buying stocks in apples. If you had put all your investment capital into apples and the price of apples depreciated, you would lose a lot of money. By diversifying and buying shares in oranges as well, you would be protected from losing money due to the fall in value of shares in apples, as more people might start to eat oranges and you would make money from that to balance out your loses. But what if the whole fruit industry, or even the whole food industry also went into decline? If you also had money invested in steel, computer chips and property (i.e. in different industries and asset classes), then you would be shielded from any loses due to the declining value of your fruit stock.

Invest in overseas assets

It is always worth investing in overseas assets as a decline in markets at home does not always affect markets elsewhere. A classic example is that despite the economic troubles which have affected the United States (and most of the Western World) over the last few years, China’s economy has seen steady growth.

It should be noted that investing overseas does have some risks associated with it, as language barriers, different (and often opaque) rules and regulations, increased difficulty in finding out information about investments, and legal complications can be something of a hassle. Nevertheless, the benefits of diversifying your investment portfolio to include international assets are compelling.

Invest in assets that offer different rates of return

The securities you invest in should vary in risk, with some investment in “safe”, well established companies with a proven record for making a profit regardless of the financial climate, as well as higher risk but potentially higher profit investments which can offset any  loses in other areas.

Mutual funds

Building a properly diversified portfolio is often beyond the means of individual investors, which is why many choose to buy shares in mutual funds that have a diversified investment strategy. The most common options here are balanced mutual funds which have a fairly simple mix of low and higher risk diversification, and other forms of asset-allocation mutual funds (also known as life-cycle, or target-date funds) which take into account an investors age, appetite for risk, and investment aims to provide a more tailored diversification structure. Such funds are often actively managed by financial experts but as mentioned elsewhere, the gains that such management can bring are often entirely offset by the additional costs of hiring a manager in the first place.

Conclusion

Diversification is one of the oldest, most often used and most well regarded among financial experts means of cushioning yourself against investment risk and should be part of every serious investor and trader’s investment strategy.

“But divide your investments among many places,
for you do not know what risks might lie ahead.”*

*Ecclesiastes 11:2 NLT

By Douglas Crawford.

An introduction

1. What is online stock trading?
2. Why use online stock trading?
3. How do I choose an online stock broker?
4. How do I open an online stock trading account?
5. How do I trade stock online?
6. What dangers are there with online stock broking?

Frequently Asked Questions

How do I learn to trade stock?

What strategies are used in stock trading?

What is technical analysis?

What is fundamental analysis?

What is the efficient market hypothesis?

What are a bull and a bear?

What are fractional expenses and how do I minimize them?

How is capital gains tax calculated on stock trades?

What is dollar cost averaging?

What is (investment) risk?

What is diversification?

What is liquidity risk?

What are some investment tips?

What are some swing trading tips?

Are Profit.ly penny stock signals a scam?

Should I buy gold mutual funds or gold exchange traded funds?

Which high franchise value stocks value are good investments?

Are high tech stocks a good investment?

How can I spot undervalued high tech stock?