Keep it simple early on
When I first started investing in my early 20s I didn’t even know what an ETF was. I’m going to be honest with you. I didn’t really even know what the stock market was.
I had managed to save up some money during University. This was mostly due to two reasons:
- My parents helped me with tuition and books by saving money and investing for me when I was a kid (we are doing that now for our kids)
- I paid for my own housing, food and entertainment by working. 2nd and 3rd year I worked as a Residence Advisor on campus which paid me by giving me free board and food. I was also and exam proctor and research assistant. I also wasn’t a big spender. I went to the bar but never blew tons of money on booze. I wasn’t into clothing (I’m still not).
My dad helped me identify a few ETFs (HUH??? ETFs?!?!) and we opened two accounts: TFSA and RRSP. It was simple and I got my feet wet.
Now with more experience and an MBA (I finally took finance and investing courses) I have my own stock portfolio and manage it on my own. For the most part, I’m happy with what I’ve built and continue to tweak it as I go.
Here are 5 things I believe new investors should stay away from. To be honest, I probably won’t be investing in any of these any time soon either.
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5 Things New Investors Should Not Invest In
1. Forex Trading
Forex (short for foreign exchange) trading is simply trading currency. There is no central market place to trade currency like there is for stocks. Forex trading can be done 24/7, 5.5 days a week and is done via computer networks.
Forex trading involves two currencies usually being traded against each other. To profit, you have to speculate which way you think a currency will go (up or down) and where they will go in the future.
2. Options Trading
I learned a bit about options trading during my MBA. It went over my head (and I think I even left that specific question blank on the exam…..!)
You can make a lot of money by trading options. A lot. But you can also lose a lot. And 9 times out of 10, new investors who don’t understand options lose money.
There are two types of options: Calls and Puts. A call option gives the owner the option to buy a stock at a specific price (known as the strike price) over a time period. A put option is the opposite – it gives the owner the option to sell a stock at a specific price over a time period.
If you think a stock is going to move upwards you buy call options. If you think the stock is going to move downwards you buy put options. It sounds rather simple but there are certain rules:
- Every option has a time premium – meaning you MUST buy or sell (exercise the option) within a time period or they expire and are worthless. The more time that passes, the less the options are worth
- The underlying stock must move sharply in the right direction. This is not usually the case for most blue chip stocks.
There are other more complicated rules and strategies and if you’re interested you can take more time to understand them a learn. Personally, the risk of options is beyond my threshold.
3. Penny Stocks
A penny stock is just that – usually a company with shares that trade in or around $1. These are usually new tech, biotech, oil exploration or other companies who are looking to break through based on bringing their product to market.
Penny stocks are risky. I wrote about them in my post: Investing mistakes I’ve made so you can read about my experience there.
While you can make a lot of money from penny stocks, there are usually more losers than winners. There is a lot of speculation built in which can drive extreme volatility.
4. Trading on Margin
Investing using margin is pretty simple to explain. It means you borrow money from the bank to invest. The bank charges you interest to borrow the money, but the hope is that you make more on the investment than you pay in interest.
Can you spot the problem? HOPE. NEVER INVEST BASED ON HOPE!!
And never invest on margin. Here’s a better idea – budget, save and invest your own money. That’s all I have to say about that!
5. Bitcoin
I’ve had a lot of questions about Bitcoin and to be honest, I was on the fence about including this in the list. I don’t fully understand or see the potential of Bitcoin. But then again, I don’t fully understand millennials. Even though technically, I am one.
Bitcoin is supposed to remove the need for a centralized banking system. Will that ever happen? I’m not sure. Banks provide a lot to our economic systems in terms of lending (e.g. how you were able to buy that house with a bank mortgage or funding a new entrepreneur) but there is always room for improvement.
Bitcoin is in its infancy and some might like the idea of getting in early. If it takes off and goes somewhere then you’ll probably make some money. But will it? That’s the million dollar question and after 10+ years its still hard to say.
Bitcoin is also extremely volatile. Take a look at the chart:
It reached a high of approx. $19,000 in 2018 and then fell to $3,800. Imagine if you bought some at the high.
If you want to learn more about Bitcoin and invest in it, learn about it. There are tons of resources including YouTube videos and and Podcasts explaining what it is and how it works.
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