Investment Options: The Five Biggest Markets

An average wannabe investor only thinks about the stock market when looking at investment options. In the world of the average investor, diversification of your investment portfolio is understood in the context of buying stocks in companies across different sectors eg banking, manufacturing, oil and gas etc. in addition to investment in mutual funds that invest in different sectors eg REITs (Real Estate Investment Trusts), Oil and Gas, commodities etc. Hence the stock market becomes the one stop shop for different types of investment. The danger in this mode of diversification is that if the market crashes and the roof caves in, every sector is affected, though by different degrees.

Average investors invest based on perceived available investment options. The optios presented to them by brokers and financial experts are usually based on what the adviser has on offer. They need your patronage to earn their commissions or fees. You pay for every transaction, when you buy and when you sell. It does not matter if you made money in the transaction or not. Your fees are not waived when you lose money. Head or tail they win.

When in comes to investment options, the bigger picture is that there are other markets the average inspector may not be aware of, or have not been informed (your adviser will not advise you to take your money (and commission) away from him).

In the world of investing, the five biggest markets are:

1) Stock Market
2) Bond Market
3) Real Estate Market
4) Currency Market
5) Commodities Market

STOCK MARKET
This does not need much introduction. This is where shares of companies are traded. Some are packaged in the form of mutual funds, hedge funds, REITs etc. A lot of rookie investors (spell traders) have gotten their fingers burnt in the market and many have vowed never to return. It is a normal cycle. By the time another boom arrives, more rookies will rush back in to make a kill, or be slaughtered. Understanding technical and fundamental analysis is key. If you do not know what you are doing, your money will end up with folks who know what they are doing.

BOND MARKET
This a risk free environment where your return known at the point of entry. You park your money for an agreed time so that others can invest it and compensate you by giving you stipends in the form of interest payment. This includes bonds, treasury bills and other money market instruments. Because the risk (on your capital) is virtually zero, the returns are quite low compared to other markers. With the credit squeeze, interest rates are at an all time low.

REAL ESTATE MARKET
For most people, their only contact with the real estate market is in shopping for their home rather than investing for cash flow or capital gain. Their homes appreciate in value but does not put money in their pockets unless as a collateral for loans. Most people shy away from the real estate market because of the hassles involved and due to the fact that they are only used to investing with their own money. The major attraction that real estate holds for the rich is the fact that they can invest with other people’s money (bank loans). Due to the good leverage available, you can decide which league to play in.

CURRENCY MARKET
The forex market is bigger than the stock market globally. You normally enter and exit on the same day although you can rollover. Like the stock market, you have to know what you are doing before you dip your toes in the water. The forex market generally has more controls than the stock market and unlike the stock market, you cannot turn over your money for others to trade for you. You often go in with a margin loan in lots of $100K from your broker, and your losses are restricted to your deposit. If you do not know what you are doing, you can get wiped out in one trading day.

COMMODITIES MARKET
This ranges from metals, oil and gas, agricultural products etc. You can either trade futures or take actual possession of the commodity. Experienced investors invest their savings in gold rather than cash in the bank. Gold tends to hold value much better than money, and appreciates over time. Gold can be found in the form of bullions, coins, jewellry etc. Closely following gold is silver and other precious metals. Women have an edge in the case of jewelry, as they can use gold both as a fashion accessory and at the same time as an investment in the commodities market. When they no longer want them or want to replace them with new jewelry, they can simply sell them for cash.

Knowing the different markets gives you more investment options which enables you pick a market that fits best with your aptitudes, risk profile, investment objectives and financial goals. With the ability to play in different markets, you can truly diversify your investments, benchmark returns across markets, and exit from markets that are yielding mediocre returns. Rather than wait endlessly for one market to recover, you can cut your losses and move your investment to other markets that will yield better returns.

Rather than stay handcuffed to your broker, you have options to move out your investment whenever you sense an impending market crash. Rather than remain in the silo of one market, you now have a bigger picture, and can make better decisions based on multiple options on your table. If you are a one market player, maybe it is time you lift up your eyes and see what other markets have to offer. You may find out that you have been shooting yourself in the foot all these years.