Investing 301

Investors are getting smarter.

They're still pretty stupid, but they're getting smarter nonetheless.

There used to be a time when investors would lose money when stock prices fell. That doesn't always happen now.

Some investors still complain about the low value of the stock market.

That's because their methods of investing haven't changed in decades. They need to catch up or forever lack the wealth they need to survive into old age.

Some people never get the chance to learn about how to invest and that's a shame. It's a shame because they will live their lives without job security and a sufficiently large pension.

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Investing isn't just about the stock market.

Investing is about stocks, bonds and currencies (in ascending order of importance). When you invest in the stock market you need to be aware of what's happening in the other two since all three interact with each other on a daily basis.

Investing is about the future and being able to correctly predict where all of these prices are going to go.

The majority of investors hope prices will move in one direction, and that's up.

Unfortuntaely for them, prices also go down.

The way around this is to trade derivatives.

The derivatives market started in the 1970's, became big in the 1980's, got even bigger in the 1990's and keeps getting bigger. So what's it all about?

Essentially, trading in derivatives allows you to benefit when prices rise or fall.

Not everyone expects prices to move in the same direction.

If you expect the price of apples to fall you would want to agree to sell apples to someone at a certain point in the future at today's price. If that person expects the price of apples to remain the same as today or to go higher then they will happily enter this agreement with you.

Of course you don't need to trade with someone else directly. You can sit at home at trade on the web.

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Investors today understand the importance of reading the financial press to understand when is the right time to buy and sell stocks.

If they broadened their knowledge of how the financial markets work they can avoid getting burned when stock prices (inevitably) fall.

One way to be wise of events on the horizon is to monitor leading indicators! But that lesson is for another day...