Forms of Financial Speculation

by on May 19, 2017

Investing for retirement takes a slow and steady approach that includes saving money, investing it, and then letting it compound over years. Sometimes it feels like a slow and drawn out process. Sometimes it even gets boring. Well, for those of us that want more excitement in our investments, this article covers a few ways to invest your money in speculative financial instruments. Here are a few of the instruments and the pros and cons of each.

Stock Options

Stock options have been around forever and are a regulated form of investment that allows you to purchase the right to buy or sell a stock or other underlying asset at a specific price. If you buy a call option to purchase the stock at 10 and the stock goes to 15, then your option would be worth about 5. Since the option would probably cost about a dollar or two, your return could easily be over 100%. However, if the stock price was under 10 when the option expired, you’d lose all your money. Investing in stock options is very risky but could generate big returns. Most people use options to hedge the risk in their investments. You can purchase stock options through almost any brokerage account assuming you set up your account as a margin account.

Financial Spread Betting

Spread betting can be done on both sporting events and financial assets. In this case, we are referring to financial. Spread betting is an unregulated form of investment that allows you to “bet” that an underlying asset or index will go up or down. For example, if you think the price of gold is going to go up dramatically, you could purchase a spread bet that would pay off if the price of gold moved in the direction you bet. Spread betting has really taken off in the UK and has a large benefit that its gains are not taxed. Of course the downside to this is that your losses cannot lower your taxes. You can make spread bets by finding a high quality online trading provider such as ETX.

CFD Trading

Contract for Differences are contracts between two people that pay the difference between a set price and the ending price of an underlying asset or financial instrument. CFDs can be used to hedge but are often used to speculate. These are popular in Australia, New Zealand and several other countries, but not available for investment in the US.

Leverage

If you’re really looking to make a big return and you are aware of the risks, you can always use good old fashioned leverage to increase the returns on your investments. Leverage is when you borrow to buy stocks or other investments. Because you only put up part of the money for the investment your returns (and losses) are amplified. For example, if you bought a stock for 10 by investing 5 and borrowing 5, and the stock goes to 15, you would earn 5 which would be a 100% return. On the other hand, if the stock went down to 5 you would lose all of your investment. Most brokers allow you to do this by using margin accounts, and there are strict rules as to how much you can buy on margin. However, in real life, you can make your own leverage by borrowing money from your house (home equity) or even from credit cards, of course I wouldn’t recommend doing either.

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