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How to Be the Perfect Copycat Investor
by Elvis Picardo
Copycat investing, as the name implies, refers to the strategy of replicating the investment ideas of famous investors or investment managers. The strategy is also known as coattail investing since the investor rides on the coattails of those who presumably have much more investment prowess.
But is copycat investing a viable trading or investment strategy? While the evidence about its success is somewhat mixed, there are certain techniques you can use to increase your chances of becoming the perfect copycat investor.
Buffett Bootleg vs. Miller Mime
The long-term success of legendary investor Warren Buffett has attracted a host of copycats over the years, and that could be because replicating Buffett’s strategy has made people money.
According to a 2008 study by Gerald Martin and John Puthenpurackal, a hypothetical portfolio that mimicked Berkshire Hathaway’s investments a month after they were publicly disclosed would have outperformed the S&P 500 by an annual average of 10.75% from 1976 to 2006.1
But before you rush off to check Buffett’s current holdings, consider the other side of the coin, when a long streak of outperformance ends with a resounding thud. Fund manager Bill Miller joined the pantheon of great investment managers after his Legg Mason Value Trust Fund beat the S&P 500 for 15 years in a row, from 1991 to 2006.2 Miller’s fund finally had a bad year in 2007—losing 6.6% and trailing the S&P 500.
However, 2008 was an outright disaster for the Value Trust, which plummeted 55%, compared with a 37% plunge for the S&P 500, as Miller loaded up on flameouts like Bear Stearns and AIG.
Investors who had mimicked Miller would have rued their decision if they had continued to do so after 2006. Miller eventually opted to step down from managing the Value Trust Fund in 2012.3
How to Be a Copycat
Copycat investing is more widespread than one would think, although it is often done discreetly and without much fanfare by institutional investors like mutual funds and hedge funds. But the idea of latching onto someone else’s investing ideas has also caught on among retail investors.
The earliest copycat investors would routinely scour regulatory filings from mutual fund companies to discover which stocks star managers had loaded up on in recent months. Nowadays, online value investing research companies such as GuruFocus offer an alternative to this arduous process by tracking and displaying the holdings of the best investors and investment managers.
Then there’s “mirror investing,” which copies the copycat strategy and takes it one step further. Services such as TD Ameritrade’s Autotrade enable an investor to link investment accounts to portfolios actively managed by other investors or investment professionals and automatically mirror every investment move that the latter make, within specific allocations set by the investor.
The obvious difference between copycat investing and mirror investing is that the former attempts to duplicate trading ideas only of well-known and recognized investment gurus.
Who Should You Copy?
Investors considering a copycat strategy should consider replicating investment ideas from the following sources.
Successful Money Managers
All institutional money managers with over $100 million in qualifying assets are required to file SEC Form 13F quarterly detailing their investment holdings.4 This is a great source document for copycat trades.
Buy-and-Hold Managers
Copycat investors would be much better served by getting ideas from long-term managers who believe in buy-and-hold, rather than investment pros who are short-term traders. This is because the time lag between an actual trade and its reporting may be a detriment to effective trade replication.
It’s better to go with someone like Buffett, who has often been quoted as saying, “Our favorite holding period is forever.â€5
Activist Investors
Activist investors like Carl Icahn can usually cause a stock to appreciate as soon as the news of their involvement in the company becomes public.6 Icahn often shares his investment plans on X (formerly Twitter), which makes it easier for copycat investors to act on them rather than waiting for regulatory filings.
What Are the Risks?
Like any other strategy, copycat investing has its share of risks.
Success Is Not Guaranteed
No investment strategy is a sure-shot winner. For example, a copycat investor may have to stick with the strategy for many years if following a value-based manager since value stocks sometimes take an eternity to turn around.
Losing patience and abandoning the strategy prematurely may result in substantial losses.
Stock May Have Already Moved
A stock may have already moved significantly between the time it was acquired (or disposed of) by a money manager and the time this news is made public. This has an adverse effect on the stock’s risk-reward profile for the copycat investor.
Too Many Copycats
Too many investors—retail and institutional—are watching the top hedge funds and money managers. Given the speed of information dissemination and trading nowadays, an investor who is a little late to a copycat trade is at a huge disadvantage, because the stock may have already moved quite a bit in a short time span.
Differing Investment Objectives
Your investment horizon and objectives may differ from that of the money manager. For example, you may have a very short-term horizon, while the manager you are copying may be in for the long haul. Or the money manager may have a risk tolerance level that is much higher than your own.
How Should You Do It?
Here are some suggestions to consider while implementing a copycat investment strategy.
Follow Credible, Successful Professionals
Stick with the tried-and-tested money managers, since you may occasionally come across a stock that could be a spectacular success. As an example, Carl Icahn sold close to 3 million shares of Netflix (NFLX) in October 2013, after the stock had more than tripled that year.
Icahn’s average cost of the Netflix stake was $58 when he originally acquired the shares on Oct. 31, 2012. A year later, the shares were sold around $323 for a gain of 457%. Copying a timely investment like that could juice up returns for any investor’s portfolio.
Exercise Patience
Chasing a stock is never a good idea. If a stock has already moved up on news that an investing heavyweight has taken a position in it, the best course of action may be to wait for it to come back within your buying range. If it does not, move on to something else.
Look for Accumulation
Large-capitalization stocks that are having hard times may be a great opportunity for patient investors. Look for such stocks where money managers have commenced accumulating significant positions since this signals their confidence in a turnaround in the near- to medium-term.
Follow Pros in Different Sectors
Don’t put all your eggs in one basket by focusing only on investment professionals in one or two sectors. Many top managers and investors in a specific sector have a considerable degree of overlap in their holdings. Diversify your copycat strategy by replicating investment ideas from gurus in different sectors.
Conduct Your Own Due Diligence
Do not assume that copying trades from the best money managers around absolves you of the responsibility to conduct your own due diligence. Ensure that copycat stock you are considering is suitable for your investment objectives and risk tolerance before you acquire it.
Who Are the Best Investors to Copycat?
If you’re going to use a copycat investing strategy, the best investors to imitate are ones with a proven track record of success, such as top mutual fund managers and well-known investors. You can also use a company’s public filings to find out more about shares bought and sold by corporate insiders and significant shareholders.
Does Copycat Investing Work?
Copycat investing can work, and it’s a great way to learn from top investors. But keep in mind that these investors, such as Warren Buffet, are working at a much greater scale, which allows them to diversify their holdings in a way that’s difficult for retail traders to emulate.
Which Investing Apps Can Do Copycat Investing?
Investing apps can help you copy others’ investments. For example, you can use eToro’s Copy Trader platform to automatically copy trades in real time.7 There are also investing research platforms like Guru Focus, which can help you identify the trades that big investors are making. You can then use nearly any investing app to place your trades.
The Bottom Line
While copycat investing has its risks, common-sense measures—such as following successful investors, exercising patience, looking for accumulation, diversifying with different sectors and conducting your own due diligence—can help you become a (near) perfect copycat and improve your chances of investment success.
Unlocking Investment Success: The Power of a Mentor
by Jack Laffan
Today, I’m going to show you the transformative power of having a guide or mentor in your investing journey. Just like navigating a complex trail requires a seasoned guide, navigating the stock market requires the insights and wisdom of a mentor. The right mentor can offer you a roadmap to success, helping you avoid common pitfalls and accelerate your learning curve.
Unfortunately, many aspiring investors embark on this journey alone. The complex world of investing, brimming with jargon and intricate strategies, can be daunting for newcomers and seasoned investors alike.
Many believe they can go it alone, underestimating the value a mentor can bring.
Other reasons include:
- Overconfidence in one’s ability to navigate the market without guidance. Â
- The perception that finding a mentor is too difficult or costly. Â
- A lack of understanding of how a mentor can provide personalized insights. Â
- The belief that online resources and tools are sufficient.
But here’s the good news: overcoming these obstacles is not only possible, but it can also be incredibly rewarding.
Here’s how, step by step:
Step 1: Recognize the value of mentorship in investing.
It’s crucial to understand that investing is not just about numbers and charts; it’s about making informed decisions under uncertainty. Reflecting on my own experience, having a mentor was like having a lighthouse guiding me through a stormy sea. A mentor’s experience can illuminate your path, helping you navigate through complex decisions with greater confidence. Warren Buffett, one of the most successful investors of all time, had Benjamin Graham as a mentor. Buffett once said, “The best investment you can make is in yourself.” And what better way to invest in yourself than by seeking the guidance of a mentor?
Step 2: Find the right mentor who aligns with your investing goals and style.
This is where many go wrong by either choosing the wrong mentor or not actively seeking one at all. Think about what you want to achieve and your preferred investing style, then look for a mentor who has walked that path successfully. My journey in surf lifesaving taught me the importance of having a capable and experienced mentor. Just as my surf lifesaving trainer tailored our training to each individual’s strengths and weaknesses, your investment mentor should provide personalized guidance that caters to your unique financial goals and risk tolerance.
Step 3: Be open to learning and evolving your investment strategy based on mentorship.
The final step is to embrace the wisdom your mentor shares with you. This doesn’t mean following their advice blindly, but rather integrating their insights with your own research and analysis. My experience on the farm, where I learned from my family the value of hard work and adaptability, showed me that success comes from listening, learning, and applying those lessons to your own context. Your mentor’s experiences, both their successes and failures, are a treasure trove of knowledge. By being receptive and adaptable, you can avoid common pitfalls and refine your investment strategy for better outcomes.
By acknowledging the value of a mentor, seeking the right guide, and integrating their wisdom into your investment approach, you’re setting yourself up for a more informed and potentially more successful investing journey.
Remember, the path to investment success is not a solo expedition but a journey enriched by the experiences and guidance of those who have navigated it before you.
The power of mentorship to accelerate your investment career
by Yolanda Beattie
Despite growing efforts to address the gender imbalance across investment management, breaking into this traditionally male-dominated field can be challenging for women. Whether it’s a need for more awareness about the industry or a lack of confidence in their abilities, women apply for and secure far fewer investing roles than their male peers. With investment teams also small with low turnover, competition for roles is intense, and opportunities often arise through existing relationships, that is, “who you knowâ€.
So, how can women get a leg up in this industry? Find yourself a mentor!
Why mentorship matters
Mentorship can be a game-changer if you aspire to a career in investment management. Mentors offer guidance and support, drawing from their own experiences to help you understand the industry, define your career goals and navigate challenges. They can open doors to networking opportunities, connecting you with industry insiders and potential job prospects. Mentors can also provide feedback on any skills gaps and help you develop essential capabilities like financial analysis and effective communication, boosting your confidence and resilience along the way.
Finding a mentor
When seeking a mentor, consider people in your existing network that you admire and respect or professional investors you have met or were inspired by at networking events. Be brave and contact them on LinkedIn to express your interest in a meeting and potential mentoring relationship. Highlight your goals and aspirations, and pique their interest with an interesting investing idea, left-field stock pick or investment thesis you’d like to discuss.
Getting the most out of mentorship
When embarking on a mentoring relationship, start with getting to know each other, sharing your experiences and building rapport. Clearly define your goals and expectations upfront, and make a solid commitment to each other to show up, come prepared, and follow through. Being receptive to feedback and maintaining open communication is critical to fostering a positive and collaborative relationship. And remember, mentorship is a two-way street, mentors get as much out of these relationships as mentees.
The Canvas Of Wealth: Navigating The Evolving Landscape Of Art Investment In 2024
By
In an era of economic uncertainty and market volatility, high-net-worth individuals (HNWIs) are increasingly turning their attention to alternative investments. Among these, the art market stands out as a compelling option, offering not just potential financial returns but also the allure of owning pieces of cultural significance. However, as we delve into 2024, the landscape of art investment is undergoing significant shifts, presenting both challenges and opportunities for savvy investors.
The State of the Market: A Delicate Balance
According to the latest UBS and Art Basel Art Market Report, the global art market experienced a slight contraction in 2023, with sales dipping 4% year-on-year to an estimated $65 billion. This decline, following two years of growth, reflects the impact of high interest rates, inflation, and political instability on the market. Yet, it’s crucial to note that despite this downturn, the market remains resilient, with values still above the pre-pandemic level of $64.4 billion in 2019.
Interestingly, while overall value decreased, the volume of transactions increased by 4% to 39.4 million in 2023. This trend suggests a shift in market dynamics, with more activity at lower price points and a pullback in the high-end segment. For investors, this presents a nuanced picture: while blockbuster sales may be less frequent, there’s increased liquidity and opportunity in the broader market.
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Geographic Shifts: New Centers of Gravity
The art market’s geographic landscape is evolving, offering new avenues for diversification. While the United States maintains its position as the global leader, accounting for 42% of the market by value, its dominance showed signs of weakening with a 3% year-on-year decline.
China, including Mainland China and Hong Kong, has emerged as a formidable player, increasing its market share to 19% and growing by 9% to an estimated $12.2 billion in 2023. This shift is particularly noteworthy for investors looking to diversify their art portfolios geographically.
The United Kingdom, traditionally a strong player, fell to third place with a 17% market share, while France maintained its fourth position with a 7% share. These changes in the global art landscape underscore the importance of a geographically diversified approach to art investment.
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The Digital Revolution: Online Sales and NFTs
One of the most significant trends reshaping the art investment landscape is the continued growth of online sales. Despite the overall market downturn, online sales increased by 7% to an estimated $11.8 billion in 2023. This figure, while down from the peak of $13.3 billion in 2021, remains almost double the pre-pandemic level and now accounts for 18% of the market’s total turnover.
The online market presents unique opportunities for investors, particularly in the lower to mid-price ranges. Data from the fine art auction sector in 2023 showed that 58% of the value in online-only auctions came from sales under $50,000, with over 85% from works sold for less than $250,000. This trend suggests that online platforms are democratizing art investments, allowing for more diverse portfolio-building strategies.
However, the NFT (non-fungible token) market, which captured significant attention in recent years, has shown signs of cooling. Sales of art-related NFTs on platforms outside the traditional art market declined for the second consecutive year, reaching $1.2 billion in 2023 – a 51% year-on-year drop. While this figure still represents a market 60 times larger than in 2020, it indicates that the NFT space remains volatile and requires cautious consideration from investors.
Emerging Trends: Prints, Multiples, and Market Bifurcation
Looking ahead, several trends are shaping the art investment landscape in 2024 and beyond. The prints and multiples market is set for continued growth, building on its impressive 18% increase in sales from 2023. This segment offers accessibility and affordability, potentially attracting a broader range of collectors and investors.
Another notable trend is the growing divide between established and emerging segments of the market. According to MyArtBroker, blue-chip artists and the secondary market are poised for continued strength and stability, while the primary market, art fairs, and ultra-contemporary artists face an uncertain future. This bifurcation presents both opportunities and risks for investors, depending on their risk appetite and investment goals.
Investment Strategies for the Discerning Collector
Given the complex and evolving nature of the art market, HNWIs should consider the following strategies when approaching art investment:
1. Diversification is Key: The divergent performance of different geographic markets and market segments underscores the importance of a diversified art portfolio. Consider balancing investments across regions, mediums, and price points.
2. Focus on Quality and Provenance: With a contraction in the high-end market, there may be opportunities to acquire blue-chip artworks at more favorable prices. However, thorough due diligence and expert advice remain crucial. Focus on works with strong provenance and established market histories.
3. Embrace Digital Platforms: The continued growth of online sales presents opportunities for acquiring art at various price points. Platforms like Artsy, Saatchi Art, and Artfinder offer access to a wide range of artworks and can be particularly useful for building a diverse collection or for those new to art investing.
4. Consider Fractional Ownership: As the market for high-end artworks becomes more challenging, explore opportunities in fractional ownership platforms. Companies like Masterworks allow investors to buy shares in high-value artworks, providing access to blue-chip pieces at lower entry points.
5. Stay Informed and Attend Key Events: Keep abreast of market trends, emerging artists, and technological developments in the art world. Attend major art fairs like Art Basel, Frieze Art Fair, and The Armory Show to discover new talent and stay connected with the pulse of the market.
6. Explore Alternative Investment Platforms: Platforms like Yieldstreet offer asset-backed art investments, providing alternative ways to gain exposure to the art market without direct ownership of artworks.
7. Be Cautious with NFTs:While the NFT market remains significant, its volatility requires a cautious approach. Consider allocating only a small portion of your art investment portfolio to this segment, if at all.
8. Seek Expert Advice: Given the complexities of the current market, working with reputable art advisors, gallerists, and auction houses is more important than ever to make informed investment decisions.
The Future of Art Investment: Challenges and Opportunities
As we look to the future, several factors are likely to shape the art investment landscape:
1. Technological Integration: Expect significant advancements in digital tools for valuation, authentication, and portfolio management. This tech revolution will enhance transparency in the market and potentially attract more tech-savvy investors to the art world.
2. Shift Towards Private Sales: As public auctions face challenges, particularly with single-owner collections, there will likely be a noticeable shift towards private transactions. This trend could reshape how high-value artworks change hands in the future.
3. Sustainability and Ethical Considerations: As environmental and social concerns become increasingly important to investors, expect to see a growing focus on sustainable practices in art production, transportation, and exhibition.
4. Emerging Markets: Keep an eye on emerging art markets in Asia, Africa, and Latin America, which may offer new opportunities for diversification and potential high returns.
5. Regulatory Changes: As the art market becomes more financialized, it may face increased regulatory scrutiny. Stay informed about potential changes in tax laws, anti-money laundering regulations, and other legal considerations that could impact art investments.
Platforms and fairs for art investing
Over the past five years, art dealers have significantly increased their use of online channels for transactions, driven by advancements in online viewing rooms and imaging technology. The COVID-19 pandemic notably boosted online sales from 13% in 2019 to 39% in 2020. As live events resumed, this share decreased but remained higher than pre-pandemic levels, stabilizing at 23% in 2023.
Dealers’ own online-only sales saw the most significant growth, doubling in share since 2019 and accounting for 20% of total sales in 2023. In contrast, sales through online art fairs and third-party platforms remained minimal. High Net Worth (HNW) collectors showed a strong preference for purchasing through dealers’ websites, though a majority still preferred in-person transactions.
The proportion of online sales to new buyers, who had never visited the gallery in person, fluctuated, indicating challenges in converting these buyers into regular clients. Larger galleries saw a higher share of regular online buyers, while smaller galleries experienced mixed success with new clients.
Despite the growth in e-commerce, dealers continued to face challenges, including political and economic instability, which affected demand. Many dealers had to offer higher discounts to close sales in 2023. Looking ahead, nearly half of the dealers expect online sales to grow in 2024, highlighting the ongoing importance of digital strategies in the art market.
Below are the most popular online platforms and offline events for exploring art investing:
1.Masterworks:
- Description: Masterworks allows investors to buy shares in high-value artworks. The platform purchases paintings and then offers shares to investors, who can benefit from the appreciation of the artwork’s value over time.
- Website: Masterworks
2.Artsy:
- Description: Artsy is an online platform that connects collectors with galleries and artists. It offers a wide range of artworks for purchase, allowing investors to buy pieces directly from the platform.
- Website: Artsy
3. Art Investment Platform (AIP):
- Description: AIP provides a marketplace for investing in contemporary art. They offer a range of services including art advisory and portfolio management.
- Website: Art Investment Platform
4. Saatchi Art:
- Description: Saatchi Art is an online gallery that allows collectors to purchase original artwork and prints directly from artists around the world. It offers a wide selection of contemporary art.
- Website: Saatchi Art
5. Yieldstreet:
- Description: Yieldstreet is an alternative investment platform that includes art among its offerings. Investors can participate in asset-backed art investments with the potential for attractive returns.
- Website: Yieldstreet
6.Maecenas:
- Description: Maecenas is a blockchain-based platform that allows investors to buy fractional ownership in high-value artworks. It leverages blockchain technology to ensure transparency and security.
- Website: Maecenas
7.Artfinder:
- Description: Artfinder is an online marketplace where collectors can buy original art directly from independent artists. It features a diverse range of artworks, from paintings to sculptures.
- Website: Artfinder
8.Rarity:
- Description: Rarity is a platform that specializes in rare and limited-edition artworks. Investors can buy and trade rare art pieces, with a focus on high-value and collectible items.
- Website: Rarity
Finding new and promising artists who may be good investment opportunities often involves attending key art events and exhibitions. Here are some of the best events and exhibitions for discovering emerging talent:
1.Major Art FairsArt Basel (Switzerland, Miami, Hong Kong)
- Renowned for showcasing contemporary art from leading galleries worldwide. It’s a premier event for discovering both established and emerging artists.
- Art Basel
2.Frieze Art Fair (London, New York, Los Angeles)
- Focuses on contemporary art and features a mix of established and emerging artists. It includes Frieze Masters, which showcases historical art.
- Frieze
3.The Armory Show (New York)
- A leading international art fair showcasing important 20th- and 21st-century artworks, with a strong emphasis on new artists.
- The Armory Show
4.Art Brussels (Belgium)
- Known for its focus on discovery, it offers a platform for both established and emerging artists, with a strong emphasis on the latter.
- Art Brussels
5.Venice Biennale (Italy)
- One of the most prestigious cultural events, featuring contemporary artists from around the world. It’s a key venue for discovering new talent.
- Venice Biennale
Venice Biennale 2024: experience and its implications for art investors
Attending the Venice Biennale can be an overwhelming experience for aspiring art investors. The event spans kilometres of beautiful and thought-provoking art, but it’s incredibly time-consuming and often the most engaging pavilions don’t necessarily align with the best investment opportunities. For instance, one of the most popular and fun exhibits; Serbian pavilion’s “Exposition coloniale” offers a profound exploration of colonialism’s lasting impact, challenging viewers to reexamine power dynamics and societal anxieties. Visitors would spend around 20 mins enjoying the immersive and sensory stimulating time machine that pushes you into the early 90s. Similarly, Zimbabwe’s pavilion presents a visually striking and conceptually rich exhibition centred around the concept of “kududunuka,” or unravelling, which pushes boundaries of time, identity, and nationhood in a sustainable way. While these exhibitions are incredibly intellectually stimulating and culturally significant, they may not translate directly into lucrative investments. The sheer volume of stimuli at the Biennale can be daunting for newcomers to the art investment world. As such, alternative approaches like fractional ownership or online sales platforms may offer a less immersive but more accessible entry point into art investing, allowing individuals to gradually build their knowledge and confidence without the sensory overload of major international exhibitions.
Conclusion: The Art of Long-Term Thinking
Investing in art requires a delicate balance of passion and pragmatism. While the market may face headwinds in the short term, the long-term prospects for art as an investment remain strong. As with any investment, a well-informed, diversified, and patient approach is likely to yield the best results.
For HNWIs looking to combine cultural appreciation with portfolio diversification, the art market in 2024 offers a canvas rich with potential. By staying attuned to market trends, embracing technological innovations, and focusing on quality and long-term value, investors can navigate the challenges of today’s art market and potentially reap significant rewards in the future.
As we move forward, it’s clear that the art market will continue to evolve, influenced by global economic trends, technological advancements, and shifting cultural values. Those who approach art investment with a blend of passion, knowledge, and strategic thinking will be best positioned to succeed in this dynamic and fascinating market.
In the end, investing in art is not just about financial returns; it’s about participating in the ongoing dialogue of human creativity and cultural expression. As you consider adding art to your investment portfolio, remember that beyond the potential for financial gain, you’re also acquiring a piece of history, culture, and human ingenuity. It’s this dual nature of art as both an asset and a cultural artifact that makes it a uniquely rewarding investment for those willing to navigate its complex landscape.
10 Day Trading Tips and How To Get Started
Day trading is a strategy that involves buying and selling financial instruments at least once within the same day, attempting to profit from small price fluctuations. This approach can be lucrative, but it can also be risky if undertaken without a thoughtful strategy.
The best day trading platforms help traders improve their strategies and minimize their costs, offering apps that make it easy to analyze indicators and execute trades. Interactive Brokers and Webull, for example, offer real-time streaming quotes, charting tools, and the ability to enter and modify complex orders in quick succession.
But for those who are just beginning their day trading journey, this article will explain the key steps to getting started and explore 10-day trading tips for beginners—from setting aside funds and starting small to avoiding penny stocks and limiting losses.
Key Takeaways
- Day trading is only profitable in the long run when traders take it seriously and do their research.
- Day traders must be diligent, focused, objective, and unemotional in their work.
- Interactive Brokers and Webull are two recommended online brokers for day traders.
- Day traders often look at liquidity, volatility, and volume when deciding what stocks to buy.
- Some tools that day traders use to pinpoint buying points include candlestick chart patterns, trend lines and triangles, and volume.
How To Start Day Trading
Getting underway in day trading involves putting your financial resources together, setting up with a broker who can handle day trading volume, and engaging in self-education and strategic planning. Here’s how to start in five steps:
Step 1: Research trading strategies and principles.
Unlike professional day traders, retail day traders don’t necessarily need a special undergraduate degree. However, you still need to educate yourself. Before you start trading, it’s crucial to understand the trading principles and specific strategies used in day trading. Read books, take courses, and study financial markets. The major topic to study is technical analysis, which should include reading up on trading psychology and (this is a must) risk management.
Step 2: Develop your trading plan.
Outline your investment goals, risk tolerance, and specific trading strategies you’ve picked up from Step 1. Your plan should specify your entry and exit criteria, how much capital you will risk on each trade, and your overall risk management strategy. Before investing real money, put your plan into practice with a real-time trading simulator. This helps you familiarize yourself with market behavior and the trading platform without financial risk.
Step 3: Choose a trading platform and fund your account.
You’ll want a reputable broker that caters to day traders and has low transaction fees, quick order execution, and a reliable trading platform. Once you’re ready, fund your account. It’s advisable to begin with a relatively small amount in your trading account and only put in money you can afford to lose.
Step 4: Begin trading with small positions.
This reduces the risks of losing all your money on one or a series of bad trades while you’re still learning. As you do so, continuously review your trades and check them against your learning resources to adjust your strategy. Day trading requires constantly adapting to changing situations.
Step 5: Maintain discipline.
Adjusting to changing circumstances does not mean shifting your stop-loss and stop-limit settings or other trading criteria as you take on more risk. Successful day trading relies very much on discipline and emotional control. Stick to your trading plan; don’t let emotions drive your decisions. That’s the way to quick ruin.
10 Day Trading Tips for Beginners
1. Knowledge Is Power
In addition to knowledge of procedures, day traders need to keep up with the latest stock market news and events that affect stocks. This included the Federal Reserve System’s interest rate plans, leading indicator announcements, and other economic, business, and financial news.
So, do your homework. Make a wish list of stocks you’d like to trade. Be informed about the selected companies, their stocks, and general markets. Scan business news and bookmark reliable online news outlets.
2. Set Aside Funds
Assess and commit to the amount of capital you’re willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their accounts per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.5% x $40,000). Moreover, only trade with suitable online brokers and trading platforms.
Earmark funds you can trade with and are prepared to lose.
3. Set Aside Time
Day trading requires your time and attention. In fact, you’ll need to give up most of your day. Don’t consider it if you have limited time to spare.
Day trading requires a trader to track the markets and spot opportunities that can arise at any time during trading hours. Being aware and moving quickly are key.
4. Start Small
As a beginner, focus on a maximum of one to two stocks during a session. Tracking and finding prospects is easier with just a few stocks. It’s now common to trade fractional shares. That lets you specify smaller dollar amounts that you wish to invest.
This means that if Amazon.com (AMZN) shares are trading at $170, many brokers will now let you buy a fractional share for as low as $5.
5. Avoid Penny Stocks
You’re probably looking for deals and low prices but stay away from penny stocks. These stocks are often illiquid and the chances of hitting the jackpot with them are often bleak.
Many stocks trading under $5 a share become delisted from major stock exchanges and are only tradable over-the-counter (OTC). Unless you see a real opportunity and have done your research, steer clear of these. Finding real undervalued stocks can be demanding.
6. Time Those Trades
Many orders placed by investors and traders begin to execute as soon as the markets open in the morning, contributing to price volatility. A seasoned player may be able to recognize patterns at the open and time orders to make profits. For beginners, it may be better to read the market without making any moves for the first 15 to 20 minutes.
The middle hours are usually less volatile. Then, the movement begins to pick up again toward the closing bell. Though rush hours offer opportunities, it’s safer for beginners to avoid them at first.
7. Cut Losses With Limit Orders
Decide what type of orders you’ll use to enter and exit trades. Will you use market orders or limit orders? A market order is executed at the best price available, with no price guarantee. It’s useful when you want to enter or exit the market and don’t care about getting filled at a specific price.
A limit order guarantees the price but not the execution.2 Limit orders can help you trade more precisely and confidently because you set the price at which your order should be executed. A limit order can cut your loss on reversals. However, if the market doesn’t reach your price, your order won’t be filled and you’ll maintain your position.
More sophisticated and experienced day traders may also employ options strategies to hedge their positions.
8. Be Realistic About Profits
A strategy doesn’t need to succeed all the time to be profitable. Traders can be successful by only profiting from 50% to 60% of their trades. However, they need to profit more on their winners than they lose on their losers. Ensure the financial risk on each trade is limited to a specific percentage of your account and that entry and exit methods are clearly defined.
9. Reflect on Investment Behavior
For day traders, frequent reflection on investment behavior is crucial. It helps them identify patterns, learn from past mistakes, and fine-tune their strategies. This fosters continuous learning and adapting to ever-changing market conditions. In addition, it encourages discipline and emotional control, which are key to successful trading.
10. Stick to the Plan
Successful traders have to move fast, but they don’t have to think fast. Why? Because they’ve developed a trading strategy in advance, along with the discipline to stick to it. It is important to follow your formula and methodology closely rather than try to chase profits. Don’t let your emotions get the best of you and make you abandon your strategy. Bear in mind a mantra of day traders: plan your trade and trade your plan.
What Makes Day Trading Difficult?
Day trading takes a lot of practice and know-how, and several factors can make it challenging.
First, know that you’re competing against professionals whose careers revolve around trading. These people have access to the best technology and connections in the industry, which means they’re set up to succeed. Jumping on the bandwagon usually means more profits for them.
Next, understand that Uncle Sam will want a cut of your profits, no matter how slim. You’ll have to pay taxes on any short-term gains—investments you hold for one year or less—at the marginal rate. The upside is that your losses will offset any gains.3
Also, as a beginning day trader, you may be prone to emotional and psychological biases that affect your trading—for instance, when your capital is involved and you’re losing money on a trade. Experienced, skilled professional traders with deep pockets can usually surmount these challenges.
An early popularizer of day trading, Toby Crabel, is also credited with a classic day trading strategy, the opening range breakout. Crabel has had some influence on technical analysis, and he often suggested that day traders are social psychologists with a computer program.4
Deciding What and When To Buy
What To Buy
Day traders try to make money by exploiting minute price movements in individual assets (stocks, currencies, futures, and options). They usually leverage large amounts of capital to do so. In deciding what to buy—a stock, say—a typical day trader looks for three things:
- Liquidity. A security with this allows you to buy and sell it easily and, hopefully, at a reasonable price. Liquidity is an advantage with tight spreads, or the difference between the bid and ask price of a stock, and for low slippage, or the difference between the expected price of a trade and the actual price.
- Volatility. This measures the daily price range—the range in which a day trader operates. More volatility means greater potential for profit or loss.
- Trading volume measures the number of times a stock is bought and sold in a given period. It’s commonly known as the average daily trading volume. High volume indicates a lot of interest in a stock. An increase in a stock’s volume is often a harbinger of a price jump, either up or down.
When To Buy
Once you know the stocks (or other assets) you want to trade, you need to identify entry points for your trades. Tools that can help you do this include:
- Real-time news services: News moves stocks, so it’s important to subscribe to services that alert you when potentially market-moving news breaks.
- ECN/Level 2 quotes: Electronic communication networks (ECNs) are computer-based systems that display the best available bid and ask quotes from market participants and then automatically match and execute orders. Level 2 is a subscription-based service that provides real-time access to the Nasdaq order book, which has price quotes from market makers in every Nasdaq-listed and OTC Bulletin Board security.5 Together, they can give you a sense of orders executed in real-time.
- Intraday candlestick charts:Â Candlesticks provide a raw analysis of price action. More on these later.
Define and write down the specific conditions under which you’ll enter a position. For instance, buying during an uptrend isn’t specific enough. Instead, put down something more specific and testable: buy when the price breaks above the upper trendline of a triangle pattern, where the triangle is preceded by an uptrend (at least one higher swing high and higher swing low before the triangle formed) on the two-minute chart in the first two hours of the trading day.
Once you have specific entry rules, scan more charts to see if your conditions are generated each day. For instance, determine whether a candlestick chart pattern signals price moves in the direction you anticipate. If so, you have a potential entry point for a strategy.
Next, you’ll need to determine how to exit your trades.
Deciding When To Sell
There are several ways to exit a winning position, including trailing stops and profit targets. Profit targets are the most common exit method. They refer to taking a profit at a predetermined price level. Here are some common profit target strategies:
| Strategy | Description |
|---|---|
| Scalping | Scalping is one of the most popular strategies. It involves selling almost immediately after a trade becomes profitable. The price target is whatever figure means that you’ll make money on the trade. |
| Fading | Fading involves shorting stocks after rapid moves upward. This is based on the assumption that (1) they are overbought, (2) early buyers are ready to take profits, and, (3) existing buyers may be scared away. Although risky, this strategy can be extremely rewarding. Here, the price target is when buyers begin stepping in again. |
| Daily Pivots | This strategy involves profiting from a stock’s daily volatility. You attempt to buy at the low of the day and sell at the high of the day. Here, the price target is simply at the next sign of a reversal. |
| Momentum | This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. Another type will fade the price surge. Here, the price target is when volume begins to decrease. |
Often, you will want to sell an asset when there is decreased interest in the stock as indicated by the ECN/Level 2 and volume. The profit target should also allow for more money to be made on winning trades than is lost on losing trades. If your stop loss is $0.05 away from your entry price, your target should be more than $0.05 away.
Just as with your entry point, define exactly how you will exit your trades before you enter them. The exit criteria must be specific enough to be repeatable and testable.
Day Trading Charts and Patterns
Here are three common tools day traders use to help them determine opportune buying points:
- Price charts using depictions such as candlesticks. Also, various chart patterns, including engulfing candles, dojis, and many others.
- Other technical analysis, including trend lines and various indicators such as the relative strength index, moving average convergence divergence, and many others.
- Volume
There are many candlestick setups a day trader can look for to find an entry point. If followed correctly, the doji reversal pattern (highlighted in yellow in the chart below) is one of the most reliable.
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Also, look for signs that confirm the pattern:
- A volume spike on the doji candle or the candles immediately following it, which can indicate that traders are supporting the price at this level
- Prior support at this price level, such as the prior low of day or high of day Level 2 activity, which will show all the open orders and order sizes
If you use these three confirmation steps, you may determine whether the doji is signaling an actual turnaround and a potential entry point.
Chart patterns also provide profit targets for exits. For example, the height of a triangle at the widest part is added to the breakout point of the triangle (for an upside breakout), providing a price at which to take profits.6
How To Limit Losses When Day TradingÂ
Stop-Loss Orders
It’s important to define exactly how you’ll limit your trade risk. A stop-loss order is designed to limit losses on a position in a security.7 For long positions, a stop-loss can be placed below a recent low and for short positions, above a recent high. It can also be based on volatility.
For example, if a stock price is moving about $0.05 a minute, then you might place a stop-loss order $0.15 away from your entry to give the price some space to fluctuate before it moves in your anticipated direction.
For a triangle pattern, a stop-loss order can be placed $0.02 below a recent swing low if buying a breakout, or $0.02 below the pattern.
You could also set two stop-loss orders:
- Place an actual stop-loss order at a price level that suits your risk tolerance. This level represents the most money that you can stand to lose.
- Set a mental stop-loss order at the point where your entry criteria would be violated. If the trade takes an unexpected turn, you’ll immediately exit your position.
However you decide to exit your trades, the exit criteria must be specific enough to be testable and repeatable.8
Set a Financial Loss Limit
It’s smart to set a maximum loss per day that you can afford. Whenever you hit this point, exit your trade and take the rest of the day off. Stick to your plan. After all, tomorrow is another (trading) day.
Test Your Strategy
You’ve defined how you enter trades and where you’ll place a stop-loss order. Now, you can assess whether the potential strategy fits within your risk limit. If the strategy exposes you to too much risk, you need to alter it in some way to reduce the risk.
If the strategy is within your risk limit, then testing begins. Manually go through historical charts to find entry points that match yours. Note whether your stop-loss order or price target would have been hit. Paper trade in this way for at least 50 to 100 trades. Determine whether the strategy would have been profitable and if the results meet your expectations.
If your strategy works, proceed to trading in a demo account in real time. If you take profits over the course of two months or more in a simulated environment, proceed with day trading with real capital. If the strategy isn’t profitable, start over.
Finally, keep in mind that if you trade on margin, you can be far more vulnerable to sudden price movements. Trading on margin means borrowing your investment funds from a brokerage firm. It requires you to add funds to your account at the end of the day if your trade goes against you. Therefore, using stop-loss orders is crucial when day trading on margin.9
Day Trading Strategies for Beginners
Now that you know some of the ins and outs of day trading, let’s review some of the key techniques new day traders can use.
When you’ve mastered these techniques, developed your own trading styles, and determined your end goals, you can use a series of strategies to help you in your quest for profits.
Although some of these techniques were mentioned above, they are worth going into again:
- Following the trend: Anyone who follows the trend will buy when prices are rising or short sell when they drop. This is done on the assumption that prices that have been rising or falling steadily will continue to do so.
- Contrarian investing: This strategy assumes a rise in prices will reverse and drop. The contrarian buys during a fall or short sells during a rise, with the express expectation that the trend will change.
- Scalping: This is a style by which a speculator exploits small price gaps created by the bid-ask spread. This technique normally involves entering and exiting a position quickly—within minutes or even seconds.
- Trading the news: Investors using this strategy will buy when good news is announced or short sell when there’s bad news. This can lead to greater volatility, which can lead to higher profits or losses.
Why Is It Difficult To Make Money Consistently From Day Trading?
Doing so requires combining many skills and attributes—knowledge, experience, discipline, mental fortitude, and trading acumen.
It’s not always easy for beginners to carry out basic strategies like cutting losses or letting profits run. What’s more, it’s difficult to stick to one’s trading discipline in the face of challenges such as market volatility or significant losses.
Finally, day trading means going against millions of market participants, including trading pros who have access to cutting-edge technology, a wealth of experience and expertise, and very deep pockets. That’s no easy task when everyone is trying to exploit inefficiencies in the markets.
Should a Day Trading Position Be Held Overnight?
A day trader may wish to hold a trading position overnight either to reduce losses on a poor trade or to increase profits on a winning trade. Generally, this is not a good idea if the trader simply wants to avoid booking a loss on a bad trade.
Risks involved in holding a day trading position overnight may include having to meet margin requirements, additional borrowing costs, and the potential impact of negative news. The risk involved in holding a position overnight could outweigh the possibility of a favorable outcome.
How Much Do Day Traders Make?
Day traders’ earnings vary widely based on experience, skill level, trading strategy, and market conditions. Some may earn a substantial income, while others may not be as successful. It’s important to note that day trading involves significant risk and is not suitable for everyone.
Is Day Trading Worth It?
This largely depends on individual circumstances, risk tolerance, and expertise. While it can offer significant profits and flexibility for some, it’s high-risk, time-consuming, and not suitable for everyone. It’s estimated that a majority of day traders don’t profit, indicating the need for careful consideration and preparation.
How Much Money Do I Need To Start Day Trading Stocks?
The Financial Industry Regulatory Authority’s (FINRA) pattern day trader rule requires a $25,000 minimum balance if you want to make four or more day trades within a five-business day span.10 Beyond that, consider transaction costs (commissions, fees) that will eat into your profits and the need for a financial cushion to handle potential losses—the FINRA rule is meant to be a minimum. It’s prudent to have significantly more capital to trade effectively and, frankly, reduce the psychological pressure of trading with money you can’t afford to lose. Day trading is highly risky, and most individual traders don’t achieve success.11 It should be approached with the understanding that it takes significant skill and a high tolerance for risk. Day trading is not the path to quick or easy profits.
The Bottom Line
Day trading is difficult to master. It requires time, skill, and discipline. Many who try it lose money, but the strategies and techniques described above may help you create a potentially profitable strategy.
Day traders, both institutional and individual, play an important role in the marketplace by keeping the markets efficient and liquid. With enough experience, skill-building, and consistent performance evaluation, you may be able to beat the odds and improve your chances of trading profitably.
72 stock market terms every beginner trader should know
By Team Stash
Learning to navigate the stock market as a new investor can be intimidating, but getting familiar with basic stock market terms can get you up and running sooner than you’d think.
Understanding stock market fundamentals is key to making smart investing decisions, keeping a pulse on the market, and eventually taking on more complex trading strategies. Use the terms below to get a jump start on learning basic stock market vocabulary and create a strong foundation for your long-term wealth goals.
What is the stock market?
The stock market is a collection of markets where people buy and sell shares of publicly traded companies. When someone invests in a stock, their investment is represented by a share, or partial ownership, of that company.
The stock market operates by potential buyers naming the highest price they’ll pay for an asset (the “bidâ€) and potential sellers naming the lowest price they’re willing to sell for (the “askâ€). Trades are typically executed by stockbrokers on behalf of individual investors.
72 stock market terms for new investors
The stock market terms below are a great starting point if you’re new to trading stocks. Study these terms to familiarize yourself with common stock lingo that any new investor should understand.
1. Arbitrage
Arbitrage refers to purchasing an asset from one market and selling it to another market where the selling price is higher than what you paid for it, resulting in profit.
2. Ask
An ask is the selling price that a trader offers for their shares.
3. Asset Allocation
Asset allocation is an investment strategy that aims to balance risk and reward by dividing a certain percentage of investments—like stocks, bonds, real estate, cash, etc.—across different assets in an investment portfolio.
4. Asset Classes
Asset classes are categories of assets, such as stocks, bonds, real estate, or cash.
5. Averaging Down
Averaging down is an investing strategy that involves buying additional shares of an asset or stock after its price has fallen, resulting in a lower average purchase price.
6. Bear Market
A bear market is a market condition in which prices are expected to fall. Typically, this entails major indexes or stocks decreasing by 20% or more compared to previous highs.
7. Beta
Beta is the measure of an asset’s risk in relation to the market. A stock with a beta of 1.5 means that the stock typically moves 50% more than the market in the same direction. Generally, a higher beta indicates a riskier investment—if the market rises 10%, the stock will rise by 15%, but if the market falls by 10%, the stock will fall by 15%.
8. Bid
The price a trader is willing to pay for shares of a stock or other asset.
9. Bid-Ask Spread
Bid-ask spread is the difference between what buyers are willing to pay and the price sellers are asking for a stock.
10. Blockchain
A blockchain is a record-keeping database in which transactions made in Bitcoin or other cryptocurrencies are recorded across multiple computers and distributed across the entire network of those computers.
11. Blue-Chip Stocks
Blue-chip stocks are common stocks of well-known companies known for their quality and history of growth.
12. Bond
A bond is a type of security loaned by an investor to a borrower like a company or government used to fund its operations.
13. Bull Market
A bull market is a market condition in which prices are expected to rise.
14. Buyback
A buyback is when a company repurchases outstanding shares to reduce the number of shares on the market and return profits to their investors, resulting in an increased value of the remaining shares.
15. Capitalization
Also known as market cap, capitalization is the total market value of all a company’s outstanding shares. It’s calculated by multiplying the total number of shares by the current share price. Check out the largest companies by market cap here.
16. Capital Gains
Capital gains refers to the profit earned after selling an asset or investment for a higher price than you paid for it.
17. Common Stock
This is one of the most basic stock market terms to know. Common stock is a type of security that represents ownership in a company. Holders of common stock are able to vote on matters like corporate policies and elect directors within that company.
18. Current Ratio
The current ratio is a measure of a company’s ability to pay short-term debt. It’s determined by dividing current assets by current liabilities.
19. Day Trading
Day trading is the practice of buying and selling shares of stock within a single day.
20. Debt-to-Equity Ratio
Debt-to-equity ratio represents a function of a company’s debt relative to its equity, or the value of its assets minus its liabilities. The ratio is found by dividing total liabilities by total shareholder equity.
21. Diversification
Diversification is an investment strategy that divides investment funds across a variety of assets in order to minimize overall risk.
 22. Dividend
“Dividend†is one of the most basic terms for the stock market. It’s simply a portion of a company’s earnings paid out to its shareholders.
23. Dividend Yield
A dividend yield is a dividend expressed as a percentage of its stock price.
24. Dollar-Cost Averaging
Dollar-cost averaging is an investment strategy in which you invest a fixed amount on a regular basis regardless of the price of the asset.
25. Dow Jones Industrial Average (DJIA)
Also known as Dow 30, the Dow Jones Industrial Average is a stock market index consisting of the 30 most-traded blue-chip stocks on the New York Stock Exchange. It’s used to measure the performance of shares among the largest U.S. companies and gauge the overall direction of stock prices.
26. Earnings per Share (EPS)
Earnings per share is a company’s profit divided by its number of outstanding shares, and is used to measure corporate profitability.
27. Economic Bubble
An economic bubble is a situation where asset prices surge to significantly higher levels than the fundamental value of that asset.
28. Equal Weight Rating
An equal weight rating is a measure used by equity analysts to signify how well a stock is performing relative to other stocks. An equal weight rating suggests that a stock will perform similarly with the average of all the stocks being used for comparison.
29. Equity Income
Equity income is used to describe any income received from stock dividends.
30. Exchange
An exchange, or stock exchange, is a marketplace where investors and traders buy and sell stocks. You’ve probably heard of the most well-known exchanges in the U.S.: the New York Stock Exchange (NYSE) and Nasdaq.
31. Exchange-Traded Funds (ETFs)
Commonly known as ETFs, exchange-traded funds are a collection of stocks or bonds combined in a single fund that can be purchased and traded on major stock exchanges. Similar to mutual funds, they’re a pooled investment fund, meaning a “pool†of money is aggregated from multiple investors.
32. Expense Ratio
An expense ratio measures the cost of owning a mutual fund, including expenses like the management of the fund, overhead fees, and any other costs associated with running the fund. It’s essentially an administrative fee paid to the company in return for owning the fund. The ratio is measured as a percentage of your total investment—for example, if you invest $10,000 in a fund with an expense ratio of .20%, you’ll pay $20 on top of your investment.
33. Futures
A future is a contract that requires a buyer to purchase a specific asset, and the seller to sell that asset at a certain future date at an agreed-upon price. Futures are a way for investors to hedge current investments—a risk management strategy intended to offset potential losses in other investments.
34. Going Long
Going long refers to the act of buying stock shares with the expectation that the asset’s price will rise, resulting in a profit.
35. Going Short
Going short—the opposite of going long—refers to the act of selling stock shares with the expectation that the asset’s price will fall. When an investor goes short on an asset, they borrow that asset, sell it, and hopefully purchase it later at a lower price if the price does decline, resulting in profit.
36. Growth and Income Funds
This is a type of mutual fund or ETF that has both a history of capital gains (growth) and income generated from dividends (income). Growth and income funds have a two-sided strategy of both long-term growth and short-term income.
37. Growth Stocks
A growth stockis a common stock of a company whose revenues are expected to grow at a significantly higher rate than what’s average for that industry.
38. Head and Shoulders Pattern
The head and shoulders pattern refers to a specific chart formation seen on a technical analysis chart. It appears when a stock price reaches three peaks: when the price peaks then declines; rises above that peak and declines again; and rises a third time (but not as high as the second peak) and then declines again. The second peak represents the formation’s “head,†and the first and third peaks represent the “shoulders.†It’s generally considered to be an indicator of an impending bear market.
 39. Index Funds
Index funds are investment funds that follow the performance of a specific benchmark or stock market index, like the S&P 500. When you invest in an index fund, your money is used to invest in every company in that index. This results in a more diverse portfolio than if you were hand-selecting individual stocks, for example.
40. Inflation
Inflation is the rate of increase in prices for goods and services in the economy.
41. Initial Public Offering (IPO)
An IPO refers to a previously private company that becomes public by selling stock
shares on the stock market.
42. Limit Order
A limit order is an order to buy or sell a stock at or below a specific price. Limit orders give traders control over how much they pay.
43. Liquidity
Liquidity measures how quickly and easily a stock can be bought or sold without impacting its price. Cash, for example, is the most liquid asset—no exchange is necessary to gain value from it, and it’s already in its most liquid form. On the other hand, a car is less liquid—regardless of its value, you might have to wait to sell it at its best price.
44. Margin
Sometimes referred to as “buying on margin,†margin is when investors borrow money from a broker to purchase a stock, similar to a loan.
45. Market Index
A market index tracks the performance of a certain collection of stocks, often grouped to represent a certain industry. They’re a tool for investors to gauge the health of the stock market by comparing current and past stock prices.
46. Market Volatility
Market volatility is a measure of how much and how often the value of the stock market fluctuates.
47. Moving Average
A moving average is the average price of stocks or other assets over a specific period of time. Generally used in technical analysis charts, it’s calculated by averaging data from the previous time periods to help investors identify the current direction of price trends.
48. Mutual Funds
Mutual funds are pools of investments from shareholders used to “mutually†buy securities like stocks, bonds, and other assets.
49. Nasdaq
Nasdaq, or National Association of Securities Dealers Automated Quotations, is an electronic exchange where investors can buy and sell stocks through an automated network of computers. It’s the second-largest stock exchange in the world, following the NYSE.
More broadly, Nasdaq can also refer to the Nasdaq Composite Index, a stock market index of over 3,300 companies listed on the Nasdaq exchange. In this context, it can be thought of similarly to other indexes like the DJIA or the S&P 500.
50. Non-Fungible Token (NFT)
A non-fungible token, more commonly known as an NFT, is a blockchain-based financial security. Each NFT represents a unique digital asset. “Non-fungible†indicates that it can’t be replicated or replaced with something else.
51. Order Imbalance
An order imbalance occurs when orders of one type of stock aren’t offset by opposite orders, resulting in an excess of orders for that specific stock and sometimes volatile price changes.
52. OTC Stocks
OTC stocks, or over-the-counter stocks, are securities that are traded on a broker-dealer network instead of on a major U.S. stock exchange. They’re often used by smaller companies who don’t meet the requirements to be listed on a formal stock exchange.
53. Outstanding Shares
Outstanding shares refers to the total number of a company’s shares that have been issued to shareholders, including restricted shares.
54. P/E Ratio
Used to value a company, the P/E ratio, or price-earnings ratio, is the ratio of a company’s share price to the company’s earnings per share.
55. Preferred Stock
Preferred stock is a type of stock that combines characteristics of both common stock and bonds. Owners of preferred stock receive different rights than common stockholders, like receiving dividends before common stockholders, but they generally don’t come with corporate voting rights like common stocks do.
56. Price Quote
A price quote is the price of a stock or other security as quoted on an exchange. Price quotes usually come with important supplemental information to help traders make more informed investment decisions.
57. Profit Margin
Profit margins are used to gauge the profitability of a company. It’s expressed as a percentage and is calculated by dividing the company’s net profit (total revenue minus total expenses) by total revenue.
58. Recession
A recession is defined as a period of decline in economic performance throughout the economy, generally lasting for at least several months.
59. Risk Tolerance
Risk tolerance is a measure of the level of risk you’re willing to accept on your investments. Someone with a lower risk tolerance typically sees lower returns on their investments in exchange for lower overall risk in periods of market decline.
60. Roth IRA
A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars, allowing your earnings to grow and be withdrawn tax-free.
61. Sector
The stock market includes shares from thousands of different companies, which are broken into 11 different sectors. A sector is a group of companies with similar business products, services, or characteristics.
62. Shares
Shares are units of ownership in part of a company’s total stock.
63. Stock Market Holidays
While this isn’t necessarily a term or definition, it’s important to know what days you can and can’t buy or sell on the U.S. stock exchange. The U.S. stock market observes 10 holidays a year, closing on those days. In 2024, the observed holidays are New Years Day, Martin Luther King Jr. Day, President’s Day, Good Friday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
64. Stock Option
A stock option is a contract that gives an investor the right to purchase or sell a specific number of stock shares at a predetermined price within a specified time period.
65. Stock Portfolio
A stock portfolio is an individual’s collection of investments, including stocks, bonds, mutual funds, and other financial assets. While a portfolio refers to all of your investments, they might not be contained in one single account.
66. Stock Split
A stock split occurs when a corporation increases the number of its outstanding shares by distributing more shares to current stockholders. By splitting existing shares into multiple new shares, the stock becomes more affordable.
67. Time Horizon
Time horizon refers to the period of time an investor expects to hold an investment, which will vary based on personal investment goals and strategies. For example, investing in a retirement account like a 401(k) has a longer time horizon, since the funds won’t be withdrawn until you reach retirement age. Generally speaking, longer time horizons correlate to more risk potential in a portfolio, and shorter time horizons correlate to a more conservative (less risky) portfolio.
68. Value Stocks
Value stocks are shares of companies selling at bargain prices that investors expect to rise because the company’s financial fundamentals suggest the shares are actually worth more than the current value.
69. Volume
Volume is a measure of how much a certain stock or other investment has been traded over a certain period of time. Volume is a critical component of strategically analyzing stock market trends, and is often used to determine market strength.
70. Volume-Weighted Average Price (VWAP)
Volume-weighted average price (VWAP) is a measure of the average trading price of a stock or other asset, adjusted for volume. It’s calculated by dividing the total dollar value of trading in that asset by the volume of trades.
71. Yield
Yield refers to the income earned on an investment over a set period of time, expressed as a percentage of your original investment.
72. 52-week Range
The 52-week range is a technical indicator that measures the lowest and highest price of a stock traded during a 52-week period. Traders use this measure to analyze current stock prices and predict its future movements.
Learning to navigate the stock market and stock trade terms for the first time might feel daunting, but consider this your official first step on the path to developing your investing muscles. When you come across a term you’re unfamiliar with in your own research, refer back to this post until you’ve mastered them. You’ll find that learning these stock terms for beginners is more doable than you think.
The more time you invest in learning stock market terms and fundamentals, the more confident you’ll become as an investor. And if you’re looking for a little more support, consider turning to a platform like Stash. We make it easy to invest what you can afford on a set schedule, all the while providing unlimited financial education and personalized advice based on your risk level—so you can start building long-term wealth, even if you’ve never invested before.
Warren Buffett’s investment advice: Top 10 tips for investing success
Written by James Royal Ph.D. Edited By Brian Beers
Warren Buffett is known as one of the best investors of all time, and he’s amassed more than a hundred-billion dollar fortune through his company Berkshire Hathaway. But he’s not only a great investor, he’s also a great wit, and Buffett enjoys sharing his folksy wisdom with fellow investors.
His advice runs the gamut of topics, not only about investing but about life in general. But today let’s stick to Buffett’s advice that could help make you rich. Here’s the surprising thing – Buffett’s wisdom seems so common sense and practical, and yet it can lead to great wealth.
Top 10 investing tips from Warren Buffett
Below are ten of Buffett’s more widely known aphorisms and what they mean for investors.
1. “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.â€
Buffett’s point sounds simple here, but it’s disarmingly complex. Of course, as an investor you’re trying to profit in the market, but one of the best ways to do that is by avoiding loss. When you eliminate decisions that expose your portfolio to loss, what’s left is more likely to be a gain. When you have more money in your portfolio, you can compound your gains even faster.
This approach has implications for how you invest. Buffett’s quote suggests that instead of looking for the highest upside, you should be looking to avoid loss first and only then look at gains. That’s a different mindset from investors who view the stock market as a slot machine.
2. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.â€
While some value investors focus on buying only the cheapest companies, Buffett suggests a better course of action is to buy “wonderful†companies – those with better economics and competitive positions. Part of the difficulty here is that whereas fair companies may go on sale relatively frequently, the great companies rarely look cheap.
But a company with a good competitive advantage will likely continue to make money over time, and it can bail you out if you purchase at a too-high price. That may not be the case for a fair company, which may falter and never return to your purchase price or beyond it.
Some of the high-quality companies Buffett has invested heavily in over the years include:
- Apple (AAPL)
- American Express (AXP)
- Coca-Cola (KO)
- Moody’s Corp. (MCO)
- See’s Candy Shops
Apple was the largest position in Berkshire Hathaway’s stock portfolio as of 2024.
3. “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.â€
Here Buffett suggests that when you see an opportunity you need to act quickly and decisively. When the odds are stacked in your favor – such as when stock prices are down significantly – you need to invest heavily, because good prices might not come along again soon.
Buffett often takes this approach when markets are down significantly. He amasses a ton of cash during the good times, and then invests aggressively when stocks plunge. Having a lot of safe cash on hand allows him to use this strategy.
4. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.â€
While some investors think investing is a lot about the numbers, Buffett suggests that investing has much to do with the behavior of investors themselves. When investors are greedy and push the prices of stocks to the sky, Buffett becomes fearful, because a market plunge may soon follow.
In contrast, when investors run away from the market or a specific stock, Buffett becomes more interested because prices are cheaper. When stocks are cheaper, they don’t have the same risk as when they’re expensive. And this is how Buffett thinks about avoiding losses.
In early 2020, the market plunged as worries about COVID rattled investors. However, some investors dove into the market amid the fear, and the market rallied furiously off its lows.
5. “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.â€
Here again Buffett touches on the value of temperament for a successful investor rather than intelligence. Rather than trying to go with or against the crowd, investors should analyze what’s going on in the market, regardless of who likes what stock. By focusing on the objective facts, investors can make decisions that are relatively free of emotion and make better choices.
6. “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.â€
This quote is one of Buffett’s most famous, and it offers the essence of picking your opportunity. You needn’t invest until you find an opportunity that you find attractive, one that meets your standards of potential reward for the risk you’re taking.
Again, Buffett counsels investors to wait until they find an opportunity that is unlikely to lose them money. You don’t have to take any chance on a stock that you don’t find attractive or a business you don’t understand.
7. “If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.â€
Buffett has long advised most investors to use index funds to invest in the market, rather than trying to pick individual stocks. By picking individual stocks you’re working against the pros who have extensive intelligence on companies. In contrast, if you buy an index fund based on the Standard & Poor’s 500 index, you’ll own the market, the target that everyone is aiming to beat.
By all means, if you enjoy investing, then do it, but most investors are going to be well served by using an index fund and especially by avoiding trading in and out of stocks. Another advantage of using index funds – immediate diversification, which lessens your risk. (See Rule No. 1.)
8. “You don’t get paid for activity, you only get paid for being right.â€
There’s no shortage of stock market analysts and commentators who are willing to tell you what you should be doing with your money at any given time. Here, Buffett reminds investors that being an active trader who constantly switches from position to position isn’t likely to produce great returns. Activity can feel productive in the world of investing, but the only thing that matters is whether you were right in your analysis.
9. “At the business school, I tell them that they would all be better off if when they got out of school somebody gave them a card with 20 punches on it and every time they made an investment decision, they used up a punch.â€
Buffett uses the punch card example to stress the importance of thinking hard about the investments you make. If you only get 20 punches in your lifetime, you’re not going to be taking a flier on a stock you heard about from your neighbor. You should reserve your investments for businesses that you truly understand and where you think you’re paying an attractive price. If you could only make 20 investments in a lifetime, you probably wouldn’t be careless in your buying or selling.
10. “After all, you only find out who is swimming naked when the tide goes out.â€
Investing can feel easy at times. Bull markets can last a long time and rallies can be fierce. But Buffett tells us that it’s only when things get tough that we find out who’s really protected and prepared to outlast the storm. At several points in his investing career, Buffett has temporarily appeared out of step with the current climate. But inevitably, the environment shifts and those who once looked smart are revealed to be swimming without their trunks on. Always make sure that your portfolio is positioned to survive a bear market.
Bottom line
While Warren Buffett may be one of most successful investors ever, his investment approach can be shared by many investors, even if they don’t want to spend a lot of time in the market. Focus on implementing Buffett’s principles and you too could become wealthy or increase your net worth substantially.
How to Invest in Gold
Gold is one of the commodities that investors perceive as a haven, especially when the stock market becomes highly volatile. Gold has the potential for a good return and is liquid. Liquidity is an investment term that describes the ability to easily exchange a commodity for cash.
But before you start investing you must first know how to invest in gold, and practically, there are different ways to invest in gold. In this article, we will show you how to invest in gold, the 4 major ways.
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Is Good a Good Choice for Investment?
Gold has become the choice for many investors for several reasons which include:
- Gold offers opportunities for decent returns.
- Gold is liquid; you can easily convert them to cash.
- Gold offers low correlations.
- Gold is a defensive store of value.
- Offers opportunity for diversification
How to Invest in Gold: 4 Ways to Invest in Gold
Here are five different ways to invest in gold:
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#1. Gold Bullion
Investing in gold bullion gives you the feel of owning physical gold. Gold bullion comes in the form of bars and coins which you have to wait for the price to rise to make a profit.
You can purchase gold bullion through an online dealer, a local dealer, or a collector. However, a major drawback to this method of investing in gold is the cost of safeguarding and insuring the physical gold.
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#2. Exchange-Traded Funds (ETFs)
Investing in gold ETF is a cheaper and less stressful way of investing in gold. By investing in a gold ETF, you don’t need to own physical gold, yet you have exposure to the commodity. A gold ETF tracks gold – it matches the price performance of gold and then subtracts the ETF’s annual expense ratio.
Another major benefit of investing in gold through an ETF is liquidity; you can easily exchange an ETF at the market price. Gold ETFs are more liquid than physical gold, you can trade the fund once the market is open.
You can also invest in Gold miner ETFs. These ETFs expose you to the biggest gold miners in the market. You can own individual miners and still benefit from diversification. Diversification reduces the risk from the underperformance of a single miner because funds are diversified across sectors.
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#3. Gold Futures
With investing in gold futures, you can speculate on the price – whether they will rise or fall. However, the major benefit of investing in gold futures is that it offers a large amount of leverage. This means that with a limited amount of money you can own a substantial amount of gold futures. With this, you stand a chance to make a fortune if the gold futures go your direction.
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#4. Investing in Mining Stocks
The last on how to invest in stock is through stock mining companies (companies involved in the production and exploration of stocks). Mining stocks allow investors to profit from their investment in two ways. You can make a profit when there’s an increase in the price of gold and if the company raises production over time.
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Conclusion
Learning how to invest in gold is the first step you should take before committing your money. And now that you know how to invest you can choose which method of investing is best for you.
What is a Follow-on Investment?
Follow-on investment is a critical aspect of startup and business financing, as it provides additional funds to support the growth and development of companies that have already received initial funding, such as through angel investments or venture capital. These investments are commonly made in stages, with investors providing more capital as companies achieve milestones or demonstrate progress, thus reducing risk for both parties and ensuring the venture’s continued success.
The valuation and price determination of follow-on investments depend on various factors, including the performance of the company since its last funding round, market conditions, and the terms of previous investment deals. Additionally, follow-on investments can take different forms, such as debt or equity, which may affect the ownership structure and capitalization of the company receiving funds.
Key Takeaways
- Follow-on investment allows companies to secure additional financing after initial rounds, supporting growth and development.
- Valuation and price determination depend on company performance, market conditions, and previous investment terms.
- Investments can take the form of debt or equity, affecting capital structure and ownership of the funded company.
What Is Follow-on Investment
Follow-on investment is an important concept in the world of finance and investment, especially in the context of early-stage startups and venture capital. It refers to the additional funding that a company receives after securing its initial investment.
One of the main reasons companies seek follow-on investments is to further develop and grow their business. Initial investments often provide a company with the resources needed to build and validate its products or services. However, as the company progresses, more funds are required for growth and expansion. This is where follow-on investments come into play.
In many cases, follow-on investments are provided by existing investors, such as venture capital firms. These investors may commit additional funds as a company achieves specific milestones or demonstrates potential for accelerated growth. Follow-on investments can also be made by new investors who may have missed the opportunity to participate in the initial funding round and want to take part in the company’s future success.
It is important to understand that venture capital funds and other investors have a limited amount of capital to work with. Therefore, they must make strategic choices about which companies to support with follow-on investments. They typically focus on startups that demonstrate a strong likelihood of success, as well as those that align with their investment strategies and goals.
There are several factors that can influence the likelihood of receiving follow-on investment. Some of these include the company’s performance, market potential, and the impact of the initial investment on the business. Additionally, the level of information transparency and innovation can play a significant role in attracting follow-on funds.
In summary, follow-on investment is a crucial aspect of startup financing. It enables companies to continue growing and expanding after receiving their initial investment. By carefully considering their prospects for success and aligning with the right investors, startups can position themselves to receive much-needed follow-on investments and propel their businesses forward.
Types of Follow-on Investment
In the world of investments, follow-on investments play a crucial role in the growth and development of companies, especially those that have undergone an initial public offering (IPO). There are different types of follow-on investments, and each type has its unique characteristics and implications for the company and its investors. In this section, we will discuss three main types of follow-on investments: Diluted Follow-on Offering, Non-diluted Follow-on Offering, and Follow-on Public Offer.
Diluted Follow-on Offering
A diluted follow-on offering occurs when a company issues additional shares to the public market, thereby increasing the total number of shares outstanding. Since the number of shares outstanding increases, the existing shareholders’ ownership stake in the company is diluted. This type of follow-on investment can result in a decline in the company’s stock price, as the increase in the number of shares can lead to a decrease in the price of each share. Companies may opt for a diluted follow-on offering to raise capital for various purposes, such as funding growth initiatives, paying off debt, or financing an acquisition.
Non-diluted Follow-on Offering
In contrast with a diluted follow-on offering, a non-diluted follow-on offering does not impact the existing shareholders’ ownership stakes. This type of offering takes place when the company issues additional shares to specific investors without increasing the total number of shares available in the public market. Since there is no dilution of ownership by public investors, it does not usually generate a negative impact on the company’s stock price. Non-diluted follow-on offerings can be used to bring in strategic investors, provide liquidity to existing shareholders, or attract new investors.
Follow-on Public Offer
A Follow-on Public Offer (FPO) is another type of follow-on investment that happens after a company has already completed its IPO. FPOs are initiated by companies to raise additional capital from the public to finance their growth plans, meet working capital requirements, or pay off debts. The process and regulatory requirements for an FPO are similar to those of an IPO, but companies may choose to issue shares at a discount or a premium, depending on the market conditions and the company’s valuation.
In conclusion, each type of follow-on investment serves different purposes and has specific implications for both the company and its investors. By understanding the intricacies of diluted follow-on offerings, non-diluted follow-on offerings, and FPOs, investors can make informed decisions to optimize their investment strategy and manage risk effectively.
Valuation and Price Determination
In the context of follow-on investment, valuation plays a critical role in making informed decisions regarding further funding. Valuation is the process of determining an asset’s worth, which can be influenced by various factors such as market conditions, competitive landscape, and projected growth.
Market price, on the other hand, refers to the current price at which an asset is being traded in the market. This price reflects the demand and supply of the asset and incorporates various market participants’ perspectives. Market value is closely related to market price and represents the price at which a buyer is willing to purchase an asset, and a seller is willing to sell.
Discount refers to the reduction in the value of an asset or investment, often used to attract buyers or reflect uncertainties in the market. In follow-on investment, discounts may be offered on the share price to attract additional investors or account for potential risks associated with the investment. Share price, in this context, refers to the price at which a company’s shares are traded in the market or offered to follow-on investors.
When evaluating follow-on investment opportunities, it is essential for investors to assess the difference between an asset’s valuation and the market price. This assessment allows them to make well-informed decisions on whether to invest further or revise their investment strategy.
For example, if an asset’s valuation is significantly higher than the market price, it may imply that the market is undervaluing the asset, presenting potential follow-on investment opportunities. Similarly, if the valuation is lower than the market price, the asset may be overvalued, signaling caution for additional investment.
Moreover, investors must consider the impact of any discounts on the share price and evaluate the potential return on investment (ROI) based on the revised valuation. This evaluation will help investors make better decisions regarding which follow-on investments to pursue and which to avoid. Ultimately, a comprehensive understanding of valuation, market price, market value, discounts, and share prices is crucial for making well-informed follow-on investment decisions.
Equity, Debt And Ownership
In financing a business, entrepreneurs often face the choice between raising capital through equity, debt, or a combination of both. Each option has its implications on the ownership structure and potential stake dilution of the firm.
Equity refers to the ownership interest in a company. By offering equity stakes, companies exchange a portion of their ownership for capital. Investors who acquire these stakes gain certain rights within the company, such as voting power and claim to future profits. Equity financing may involve the issuance of common shares, preference shares, or convertible securities.
Debt, on the other hand, is a form of borrowed capital that companies repay over time. Companies obtain loans or issue bonds to raise debt financing. Unlike equity, debt does not involve giving up ownership stakes. Instead, companies pay periodic interest to lenders and repay the principal at the end of the loan term.
When it comes to ownership, both financing options have distinct implications. By raising capital through equity financing, companies may experience a dilution of their ownership stake as new shares are issued. This process can decrease the control that founders and early-stage investors have over the company. However, equity financing can be attractive to businesses as it does not encumber cash flows with regular interest payments, allowing them to reinvest profits back into the company’s growth.
Debt financing, on the other hand, does not result in ownership dilution since no new shares are issued. This means that existing owners retain control over the company and do not have to share decision-making power with new investors. However, regularly servicing debt can strain a company’s cash flow, potentially limiting their ability to invest in growth or respond to new opportunities.
It’s worth noting that businesses can opt for a combination of debt and equity financing to balance the benefits and drawbacks of each approach. In some cases, companies may issue follow-on equity or convert existing debt into equity interests, adjusting their capital structure over time.
The choice between equity, debt, and ownership structures depends on various factors, including the company’s stage of development, risk profile, and potential growth. Careful consideration of these factors will help businesses select the financing strategy that maximizes value and supports long-term success.
Investment Stages
Seed Stage
The seed stage is the earliest phase of a company’s development, in which an idea or a product begins to take shape. This stage mainly focuses on market research, developing a prototype, and creating a business plan. Funding in the seed stage often comes from the founder’s personal savings, friends, family, angel investors, or a seed fund. These investments are crucial, as they provide essential resources for the entrepreneur to build the foundation of their business and attract further investment.
Series A
Series A financing represents the next stage in a company’s growth. At this point, the business has typically validated its product or service and begun generating revenue. The primary goal for Series A funding is to accelerate growth, whether through expanding a company’s team, entering new markets, or refining its product offering. Investments during this round are typically made by venture capital firms, seeking promising businesses with growth potential.
Series B
Following successful Series A financing, a company may move on to Series B funding. This stage is characterized by further growth and an increased focus on executing the business strategy. Companies at this stage have often achieved a certain level of market traction and proven the viability of their product or service. Series B investments help businesses scale up their operations and meet the growing demand for their offerings. Like Series A, this round usually involves venture capital firms, along with some follow-on investments from previous investors.
Series C and beyond
Series C financing, and any subsequent rounds, focus on sustaining and expanding the business to new heights. By this stage, a company is typically well-established in the market and generating significant revenue. Funds from Series C and beyond are used for strategic acquisitions, global expansion, or development of new products or services. These rounds may involve various types of investors, including private equity firms, strategic corporate investors, and sometimes even private incentives, depending on the needs of the company. Companies that reach this stage of investment have often demonstrated both a successful business model and a significant capacity for growth.
Role of Investors
Venture Capital
VC firms play a crucial role in follow-on investment. Aiming to invest in high-potential, early-stage companies, these firms usually provide substantial financial resources to support the growth and development of businesses in exchange for equity ownership. A study found that decisions regarding follow-on financing often depend on the existing investors, with VC funds leading the way.
Furthermore, the Kauffman Fellow program is an initiative that trains and supports venture capitalists to refine their investment strategies. Kauffman Fellows often work with venture funds and emerging fund managers to identify promising businesses and facilitate follow-on investments. Their careful evaluation and involvement can assist startups in securing essential funds for future growth and development.
Angel Investors
Angel Investors, often successful entrepreneurs or professionals, also play a significant role in follow-on investment. These individuals invest their own personal resources into early-stage companies in exchange for equity ownership. According to a research, investments made by angel investors often lead to further venture capital financing. Their vast experience and knowledge in a specific industry can play a critical role in helping businesses secure crucial follow-up funding.
In conclusion, both venture capital firms and angel investors play vital roles in the follow-on investment landscape. Their support and guidance not only provide startups with financial resources but also helps them navigate challenges and seize opportunities to fuel continued growth.
Role of Companies
Various entities, including public companies, private companies, and startups, play a significant role in the follow-on investment landscape. These companies serve as a driving force for innovation and growth in their respective industries.
Public companies, such as Google and Facebook, often participate in follow-on investments to support promising startups and early-stage firms as strategic investors. Being established players in their industries, they use their resources and expertise to help these ventures scale and develop new technologies. These investments can lead to strategic partnerships, acquisitions, or competitive advantages in the market.
Private companies also contribute to follow-on investment activities, especially in industries with high growth potential. These firms usually have more flexibility than public companies and can act quickly to seize lucrative opportunities. For startups and early-stage ventures, receiving follow-on investments from private companies can provide valuable resources and connections for future growth.
Startups, such as Tesla in its early years, often rely on follow-on investments to fuel their growth and expansion plans. These investments can come from venture capitalists, angel investors, or even public and private companies in related industries. Follow-on financing helps startups continue their research and development efforts, scale their operations, and potentially achieve profitability.
In summary, the role of companies in the follow-on investment landscape is multifaceted, with different entities offering resources, expertise, and strategic support. This dynamic ecosystem is essential for fostering innovation and driving long-term growth across industries.
Capital Structure and Fundraising
In the context of follow-on investments, the capital structure of a company plays a crucial role in attracting venture capital investors and securing additional funding for growth. Capital structure refers to the mix of debt and equity that a company uses to finance its operations and assets, while fundraising relates to the process of raising capital from investors.
A well-thought-out capital structure helps maintain the growth momentum of a company. In cases where companies have already secured a funding round, a follow-on funding round can be explored to further accelerate their growth or to maintain working capital. This additional capital is often raised through the issuance of shares, including common shares.
Working capital is a vital component of a company’s overall operations, as it helps cover short-term expenses and manage cash flow. The balance between debt and equity in a company’s capital structure is critical, as it can impact the company’s borrowing costs, attractiveness to investors, and financial flexibility. A follow-on capital raise can significantly influence the capital structure, and businesses should carefully plan the terms and conditions associated with it.
When it comes to follow-on investments, venture capital (VC) investors often analyze the capital structure of a firm to assess its risk profile and growth potential. For instance, a company with a high proportion of debt might be less attractive to VC investors due to increased financial risk. On the other hand, a company with a diversified capital structure may indicate a more promising growth trajectory.
A company’s shares represent an ownership stake in the firm and can be issued to both existing shareholders and new investors during a follow-on investment round. Generally, companies issue common shares, which carry voting rights and can generate dividends for shareholders. Issuance of shares to new investors during a follow-on financing event can help the company to raise the necessary capital while also allowing existing shareholders to maintain or increase their ownership stake.
In follow-on investment rounds, a lead investor with pro-rata rights is entitled to participate to maintain their existing ownership percentage as the company issues more shares. Pro-rata rights are a crucial mechanism for investors, especially lead investors, who aim to preserve their influence and stake in the company amidst dilution caused by new share issuances. These rights allow the lead investor to purchase additional shares in correspondence to their existing ownership, thereby not only sustaining their influence but potentially playing a pivotal role in attracting other investors. By exercising pro-rata rights, a lead investor showcases continued commitment, which can enhance the perception of the company’s value and stability, thus making the follow-on round more appealing to new investors. This, in turn, facilitates a symbiotic association where both the company and the investors can work towards mutual growth and value creation.
In summary, the capital structure and fundraising activities of a company are essential elements for attracting follow-on investments. Firms should be mindful of their capital structure and working capital needs to maintain financial stability, while also focusing on strategically managing share issuances to maximize growth potential and secure the trust of venture capital investors.
Market Impact and Considerations
The emergence of follow-on investment in the biotechnology sector has significantly influenced the capital markets, particularly the secondary market. These events allow companies to raise additional capital for research and development while providing investors with opportunities to engage in financing activities that support innovative advancements.
In a secondary offering, existing shareholders or investors sell a portion of their shares, which are then available for purchase by new investors through the stock exchange. This market-driven process allows for the diversification of an investor’s portfolio while enabling companies to expand their reach within the industry.
Follow-on investment has also introduced a process known as secondary market offering, where companies issue additional shares to the public. This practice allows companies to access more resources for growth and innovation. Moreover, it has a direct impact on capital markets as it enables companies to remain competitive and adaptive to the dynamic market environment.
Market-driven initiatives, such as follow-on investments, exhibit the interconnection between various financial entities like the stock exchange, capital markets, and investors. As the companies receive the necessary funds for research and development, investors can also expect a return on their investment.
It is important to note that the capital markets play a crucial role in nurturing innovation-driven startups, especially in the biotechnology sector. By facilitating access to resources, these markets contribute to the growth of the companies while ensuring that their products and services remain responsive to the market demands.
In conclusion, follow-on investment’s impact on the market must be carefully considered by companies and investors alike. By leveraging the benefits of secondary markets and secondary offerings, companies can foster innovation and ensure their continued growth and competitiveness within the industry.
The Regulatory Environment
The regulatory environment plays a crucial role in governing the follow-on investment landscape. A fundamental entity in this context is the Securities and Exchange Commission (SEC), which oversees the securities industry in the United States, protecting investors, maintaining fair market operations, and deterring fraud.
To provide a clearer understanding of the regulatory framework surrounding follow-on investments, it is necessary to emphasize the importance of a prospectus. This is a formal legal document filed with the SEC, which provides essential information about a company, including its financial status, legal structure, and investment objectives. Issuing a prospectus is a prerequisite to gaining approval for any follow-on investments, fostering transparency, and allowing potential investors to make informed decisions.
Furthermore, underwriters play an instrumental role in the follow-on investment process. They work closely with the company intending to raise capital by helping them issue new securities. Their main responsibilities include assessing potential investment risks, determining the appropriate pricing for securities, and ensuring a smooth execution of the transactions.
One crucial component of the underwriting process is the book-building process. This term refers to the collection and compilation of investors’ bids for the securities being offered by the company. Book-building helps establish a clear understanding of the demand for the securities, ultimately informing the final pricing and allocation decisions made by the underwriters and the company. This mechanism plays a vital role in ensuring market-driven pricing and vitalizing capital markets.
In conclusion, the regulatory environment is a vital aspect of the follow-on investment landscape. The various entities such as the SEC, prospectus, underwriters, and the book-building process contribute significantly to promoting transparency, strong market operations, and facilitating informed decisions by investors.
Follow on Investment In the Context of Larger Business Strategy
Follow-on investment plays a crucial role in supporting the growth and development of a portfolio company. By providing additional funding, investors enable the company to undertake new projects, enhance research and development efforts, and even consider strategic acquisitions.
Earnings per share (EPS) can serve as an important indicator for follow-on investment decisions. As a company grows and generates consistent revenue, its EPS often increases, reflecting a higher profitability potential. This, in turn, can attract investors who see the value in financing the company’s future endeavors by contributing additional capital.
One of the key areas where follow-on investments can make a significant impact is research and development. With more capital at their disposal, companies can invest in innovative technologies, products, and services that help them maintain a competitive edge in their respective markets. Research and development often entails substantial costs, and receiving follow-on funding can be the lifeline these companies need to stay ahead of their competition.
New projects are another area where follow-on investments can be pivotal. As a portfolio company expands, it may require additional resources to initiate and sustain new revenue-generating ventures. In such cases, follow-on funding enables the business to tap into fresh opportunities, scale their operations, and potentially enter new markets.
Acquisitions can also be facilitated by follow-on funding. With additional capital, a company can strategically acquire complementary businesses that support their long-term goals. By integrating these acquisitions into their current operations, businesses can often achieve synergies that drive growth and enhance their overall market presence.
In conclusion, follow-on investment is a crucial aspect of a company’s larger business strategy, as it provides much-needed capital for research and development, new projects, and acquisitions. This additional funding can secure the company’s future success by fostering growth and innovation while maintaining a competitive edge in the evolving market landscape.
Conclusion
In the world of early-stage technologies and startups, follow-on investment plays a crucial role in ensuring continuous growth and development. It is essential for companies to secure follow-on funding from venture capitalists and other investors to further their business objectives and scale their operations.
One key factor influencing follow-on investment is the initial public financing, which can impact private incentives for venture capital firms to financially back technologies and products in their subsequent stages. A well-structured initial funding round can provide the groundwork for attracting further investments in future rounds, allowing companies to sustain innovation and remain competitive in the market.
The role of information transparency should also be considered, as it can significantly affect investment in follow-on innovation. Ensuring that potential investors have a clear understanding of a company’s knowledge and technology resources can lead to higher levels of follow-on investment, as investors are more confident in the firm’s ability to deliver successful results.
Moreover, patents have been shown to influence follow-on innovation, which can contribute to the need for follow-on investment. Securing patents demonstrates a company’s commitment to protecting its intellectual property and can ultimately drive further investment in the firm’s innovative efforts.
In summary, attracting follow-on investments depends on several factors, including the structure of initial funding rounds, information transparency, and the strategic use of patents. Companies striving for continuous growth should take these considerations into account when developing their strategies to secure the necessary financial support for their ongoing operations and innovation initiatives.
Frequently Asked Questions
What are the benefits of follow-on financing?
Follow-on financing offers several benefits to startups and investors. For startups, it provides additional capital to help them grow, develop products, and expand into new markets. This financing can also help startups overcome cash flow challenges and enable them to hire more talent. For investors, follow-on investments can strengthen their relationship with the startup and offer the opportunity to increase their stake in a promising venture, potentially yielding higher returns over time.
What are the common stages for follow-on investment?
Follow-on investments typically occur in several stages as a company progresses through its lifecycle. The most common stages include seed, Series A, Series B, and Series C funding rounds, each targeting different milestones in a startup’s development. Seed rounds usually involve the initial investment, while Series A focuses on product development and generating traction in the market. Series B funding enables companies to scale, and Series C is used for further expansion and even mergers or acquisitions.
How do startups determine the need for follow-on funding?
Startups assess their need for follow-on funding based on various factors like milestones reached, market conditions, and financial outlook. This assessment often involves examining the company’s runway, which refers to the period a startup can operate before running out of money. If the runway is short or a significant milestone, such as product launch or expansion, is approaching, follow-on funding may be necessary to avoid stalling growth or loss of industry positioning.
What factors influence follow-on investment decisions?
Follow-on investment decisions are influenced by factors such as the startup’s performance, market conditions, investor sentiment, and the availability of alternative investment options. Investors may consider the company’s progress in product development, customer growth, and revenue generation, along with the competitive landscape and market trends. In some cases, external events like regulatory changes or macroeconomic factors can also impact follow-on investment decisions.
How do investors evaluate opportunities for follow-on investments?
Investors evaluate follow-on investment opportunities by analyzing the startup’s fundamental performance, business model, and growth potential. They may assess the company’s financials, assess the management team’s strength, and evaluate the product’s market fit. Additionally, investors may consider their current portfolio allocations, the investment’s risk-reward profile, and the potential impact on their overall returns.
Are there risks associated with follow-on investment?
There are risks associated with follow-on investments, such as the possibility of diluting ownership stakes, overcapitalization, and failing to meet growth expectations. Investors may also face the risk of increased competition or adverse market conditions that could impact performance. Startups should carefully weigh the potential benefits and risks before seeking follow-on funding to ensure it aligns with their long-term goals and strategy.
How does fund structure influence follow-on investment decisions?
The fund structure can significantly influence follow-on investment decisions. For instance, a larger fund may have more capital allocated for follow-on investments, allowing for greater flexibility in supporting portfolio companies through multiple rounds of financing. Conversely, a smaller fund might have limited resources, making it crucial to judiciously decide on follow-on investments to ensure optimum portfolio construction.
What role does portfolio construction play in follow-on investments?
Portfolio construction is central to follow-on investments. An investor aims to build a balanced portfolio with a mix of new investments and follow-on investments in existing portfolio companies. The aim is to mitigate risks associated with failed investments and ensure a steady growth trajectory. Follow-on investments can be a tool to double down on promising ventures and maintain a good deal of diversification.
How do investors identify a ‘good deal’ for follow-on investments?
Identifying a good deal for follow-on investments involves assessing the startup’s past performance, growth potential, and the terms of the new financing round. A good deal would often mean a fair valuation, favorable terms, and a clear path to value creation which aligns with the follow-on strategy of the investor.
How does fund size impact a fund’s approach to follow-on investments?
A larger fund, due to its size, might have a longer investment period and greater capacity to participate in follow-on rounds, compared to a smaller fund. The larger fund may also have a more structured follow-on strategy, allowing for sustained support to portfolio companies, while a smaller fund might be more selective due to limited resources.
How can failed investments impact the decision for follow-on funding?
Failed investments can be learning experiences for investors, altering their approach towards follow-on funding. They may become more cautious and stringent in evaluating new and follow-on investment opportunities, to ensure better portfolio performance and risk management.
Does portfolio size affect an investor’s follow-on strategy?
Yes, portfolio size can affect an investor’s follow-on strategy. Investors with a large number of small businesses or startups in their portfolio might adopt a different follow-on strategy compared to those with a small number of larger, more established companies.
How might new investments impact follow-on funding decisions?
New investments can impact follow-on funding decisions as they might shift an investor’s focus or allocate resources that could have been used for follow-on rounds. It’s a balance between nurturing existing portfolio companies and exploring fresh, potentially lucrative opportunities in new companies.
How does the investment period affect follow-on investment decisions?
The investment period can affect follow-on decisions as investors need to manage their fund’s lifecycle, ensuring they have enough capital for new and follow-on investments. A longer investment period might allow for more follow-on opportunities, while a shorter period might necessitate more selective follow-on investments.
How can follow-on strategy vary between investing in small businesses and larger private companies?
Follow-on strategy can vary significantly between small businesses and larger private companies. Investing in a new company, especially a small business, may require a different risk assessment and follow-on strategy compared to a more established private company where the business model and market position are more defined and stable.
The Case for Mentorship in Financial Services
The world of finance and lending has never been particularly welcoming to women looking to climb the ladder and lead major financial institutions. According to Mckinsey, less than one-third of SVP and C-suite roles at financial institutions are filled by women, despite women making up 53% of entry-level finance positions. Deloitte puts that number even lower, with just 24% of leadership roles filled by women and only 9% in senior leadership positions.
These figures are striking, and a clear sign this industry isn’t tapping into the creative minds and diverse experiences that could help us deliver better products and services. Given many women start in entry-level positions and do not advance into leadership is a loss of institutional knowledge, front-line experience, and untapped potential. There is a solution. If companies mentor and nurture talent, that untapped potential can lead to institutional change, and there is a strong business case for doing so. Thetop companies know this. Eighty-four percent of Fortune 500 and 100% of Fortune 50 companies have formal mentorship programs. Those companies with mentorship programs are more profitable and experience less turnover than those without similar programs. Moreover, those companies with a female CEO in 2020 weathered the pandemic and the economic downturn better than those with a man at the helm.
Creating an effective mentorship program doesn’t have to be complicated or time-consuming, but it does require commitment. Below are a few considerations to implementing a mentorship program.
1. Your investment will yield dividends.
Yes, it’s great to provide opportunity to people, but it also has to make dollars and sense, and mentorship programs deliver on that front. Sixty-seven percent of businesses with mentorship programs report an increase in productivity, while 55% say it has positively impacted their profitability.
There are also cost benefits that don’t appear on the balance sheet. Employees with a mentor are much more likely to stay at a company if they are involved in a mentorship program. The Wharton School found that retention rates were 72% and 69% for mentees and mentors, respectively. For those who didn’t participate, retention was just 49%. Even more compelling was that mentors were promoted six times more often than those not in the program, and mentees were promoted five times more often.
The Harvard Business Review found that CEOs who receive mentorship are better at making decisions, helping them avoid costly mistakes. It stands to reason that employees at all levels can become better, more productive employees with a similar level of guidance.
2. Both the mentor and the mentee will benefit.
Productive mentor programs require the mentor and mentee to get something out of the arrangement. Luckily, most employees who participate in these programs report a high level of engagement and satisfaction.
The benefits to the mentee seem fairly obvious, e.g., improving skills, having a sounding board, increasing one’s professional network, and gaining valuable industry knowledge. The benefits to mentors may be less obvious, but the impact is real. A Coqual report found that involvement in a mentorship program helped 57% of mentors improve their own skillset, and 43% of mentors walked away with a better understanding of their customers.
The key to successful mentor/mentee relationships is to think about the pairing and how the personalities might complement each other. Don’t expect things to click instantly. It’s important to allow at least six months of regular interaction to develop trust and rapport.
3. You’re creating a culture, not just a program.
It’s easy to think of mentorship as just another offering in the employee handbook, but the results go much deeper. In creating an environment that provides mentor/mentee learning opportunities, you’ll change the culture at your company in a way that encourages learning and the passing on of knowledge. One study showed that 90% of employees with a mentor reported being happy at work. Furthermore, the majority of mentees who stay with a company go on to mentor others to share the experience. That’s a powerful way to impact change at a company and demonstrate a commitment to helping employees advance their careers.
In the end, the case for mentorship is clear. The question isn’t can we afford to do this, but how can we afford not to?
The Case For Investing In A Paid Career Mentor
For generations, the idea of career mentorships has been primarily driven by a philanthropic approach. Older professionals assume responsibility for imparting knowledge to the younger, and industry experts generously share their expertise with anyone scrappy enough to seek guidance. Traditionally, mentorship has been an imbalanced give-and-take, where wisdom is passed along as a form of charitable donation.
However, a significant shift is underway, and it could signal a substantial transformation for workplace mentorships and the future of work. The concept of mentorship is evolving from a purely altruistic endeavor to one that acknowledges the profound value that time-earned wisdom and specialized expertise bring to the table. In line with this paradigm shift, trademark attorney Rosezena J. Pierce advocates for a new perspective: individuals seeking career mentorships should be willing to invest in them. “This is an age of information. A lot of people expect to be compensated for the time they invest in sharing their knowledge,†she told ESSENCE.
Today’s dynamic landscape demands a paradigm shift. In a skills-based economy, where monetizing expertise has become the norm and prevailing economic conditions drive many individuals to rely on side hustles to make ends meet, it becomes imperative for both individuals and corporations to reevaluate their strategies for earning, learning, and disseminating knowledge. A shift to a more reciprocal and mutually beneficial perspective on mentorship is essential.
Here’s why both companies and individuals should consider investing in the exchange of knowledge through paid mentorship programs.
Elevating Mentorship: You Respect Where You Invest
When money’s on the table, everyone brings their A-game. “I’ve gotten the most out of the mentorships I had to pay for,†Pierce shared. “I showed up differently because I invested in them, and the mentor showed up differently because they were being paid for their services.â€
It’s not just about dollars and cents; it’s about a shared commitment that propels both the mentee and mentor to elevate their contributions. This investment goes far beyond financial contributions—it’s an investment in each other’s professional development and success.
From the factory floor to the executive suite, seasoned professionals bring insights earned through years of hands-on experience. While advances in tech, like generative AI, enhance data-driven decision-making, they’re no substitute for institutional knowledge. In mentorship, the wisdom derived from hands-on experience is irreplaceable.
Experienced mentors offer less experienced mentees the profound benefit of lessons learned from successes and setbacks. They’ve seen things and developed instincts translating to profound insights that can’t be replicated by a computer program or code. That’s worth a lot.
Compensating senior workers or retirees for mentoring mid-level managers aligns with the changing dynamics of workplace mentorships. It is an investment that not only preserves and transfers critical institutional knowledge but also contributes to the continuous growth and success of the organization in a rapidly evolving business environment.
Investing in paid career mentorships is a win-win-win. As we navigate a skills-based economy, where monetizing expertise is the norm, the call for a more reciprocal and mutually beneficial approach to mentorship is reasonable, equitable, and valuable for all parties involved.
The 5 Mentors Behind Buffett’s $1.1 Trillion Investment Empire
Warren Buffett released his 2024 annual shareholder letter on Saturday, drawing the immediate attention of investors and business leaders worldwide. As stakeholders parsed the document for insights into Berkshire Hathaway’s condition, they were rewarded with the wisdom that has made Buffett a legendary figure in finance. This marks the 60th year of Berkshire under his leadership, with the conglomerate’s market cap now exceeding $1.1 trillion. While its unprecedented success is evident, the intellectual architects who shaped Buffett’s investment philosophy deserve recognition for their contributions to this remarkable legacy.
Benjamin Graham: Establishing the Value Framework
Benjamin Graham, widely regarded as the father of value investing, provided Buffett with his fundamental understanding of markets. Graham’s essential principle—that purchasing a stock means acquiring partial ownership in a business—revolutionized Buffett’s market approach. Rather than seeing stocks as tradable securities, Graham taught Buffett to analyze the underlying business and determine its intrinsic value. This perspective enabled Buffett to look beyond market volatility and make decisions based on business fundamentals rather than price fluctuations.
Philip Fisher: Mastering Deep Research Techniques
While Graham supplied Buffett’s value foundation, Philip Fisher introduced him to the critical importance of comprehensive research and high-quality businesses. Fisher’s “scuttlebutt” methodology—collecting intelligence about companies from diverse sources including competitors, suppliers, and customers—became integral to Buffett’s research process. Fisher’s emphasis on identifying companies with sustainable competitive advantages, or “moats,” significantly influenced Buffett’s gravitation toward businesses with enduring market positions and pricing power.
Ed Thorpe: The Mathematics of Risk and Concentrated Positions
Ed Thorpe contributed two vital elements to Buffett’s investment approach: survival prioritization and strategic concentration. Thorpe’s principle that investors must first ensure survival before pursuing returns helped shape Buffett’s disciplined risk-management philosophy. Additionally, Thorpe’s strategy of making concentrated investments when possessing a clear advantage reinforced Buffett’s comfort with portfolio concentration. This influenced his willingness to make substantial commitments when identifying exceptional opportunities, rather than diluting returns through excessive diversification.
Charlie Munger: The Quality Revolution
No individual has influenced Buffett’s evolution as an investor more profoundly than Charlie Munger. Munger guided Buffett’s transition from Graham’s strict value approach toward focusing on exceptional businesses available at reasonable prices. He particularly emphasized the power of companies that could transform commodities into branded products commanding premium margins. Munger’s influence led to Buffett’s iconic investments in companies like Coca-Cola, where brand strength and operational efficiency created durable competitive advantages.
The Management Masters: Leo Goodwin, Tom Murphy, Henry Singleton, and Bob Kierlin
Geico’s Leo Goodwin, Capital Cities/ABC’s Tom Murphy, Teledyne’s Henry Singleton, and Fastenal’s Robert Kierlin exemplify the exceptional executives who shaped Buffett’s appreciation for superior leadership. Murphy’s disciplined capital allocation at Capital Cities/ABC, Singleton’s pioneering share repurchase strategy at Teledyne, and Kierlin’s innovative distribution approach at Fastenal demonstrated how skilled management could generate extraordinary shareholder value through different methodologies. Their collective influence taught Buffett the importance of identifying and backing talented leaders capable of building enduring cultures of excellence. This appreciation for exceptional management has guided his preference for retaining successful leadership teams after Berkshire acquisitions, allowing them to continue creating value with minimal interference.
The collective wisdom of these mentors transformed Buffett from a pure value investor into a more sophisticated practitioner focused on business quality, competitive durability, and extraordinary management. Their teachings emphasized that successful investing requires more than identifying undervalued stocks—it demands understanding business fundamentals, conducting thorough research, managing risk effectively, recognizing quality, and backing superior leadership. These principles have not only directed Buffett’s personal success but have become the foundation of Berkshire Hathaway’s enduring investment philosophy and exceptional market performance over six decades.
Mastering Trend Following Strategies: A Comprehensive Mini Guide
Trend following, an investment strategy par excellence, hinges on the premise of capitalizing on market momentum. It’s predicated on the philosophy that financial markets exhibit discernible trends over time, which, if identified and followed, can lead to substantial gains. This approach eschews the traditional paradigms of market forecasting or company-specific analysis, instead focusing on the movement of market prices themselves as the primary indicator of where to invest.
At its core, trend following involves a systematic, quantitative approach to market analysis. Traders employing this method rely on algorithms and models that identify potential trends in asset prices. Once a trend is identified, the strategy dictates that one should invest in a manner that aligns with the direction of the trend – buying assets in an uptrend and selling or shorting assets in a downtrend. The beauty of this approach lies in its simplicity and adaptability; it can be applied across various asset classes, including stocks, bonds, commodities, and currencies, making it a versatile tool in an investor’s arsenal.
Importance of Trend Following in Investing
The importance of trend following in the investing world cannot be overstated. This strategy offers a robust framework for managing risk and maximizing returns in an inherently unpredictable market. One of the key advantages of trend following is its ability to profit in both rising and falling markets. Unlike traditional buy-and-hold strategies, which are heavily reliant on continually rising markets to yield returns, trend following thrives on volatility and market movement, regardless of direction.
Moreover, trend following provides a psychological edge. By relying on systematic, rule-based decision making, it removes emotional biases that often hinder investment performance. In tumultuous market environments, when investor sentiment can swing wildly, having a disciplined, emotion-free approach is invaluable. This method also offers diversification benefits. Since it can be applied across a range of asset classes, it allows for a more balanced and diversified investment portfolio, reducing the risk of significant losses due to market downturns in any single asset class.
Understanding Market Trends
Different Types of Trends
Deciphering market trends is a cornerstone of the trend-following approach, necessitating a deep understanding of their various manifestations. Predominantly, trends in financial markets can be classified into three archetypes: uptrends, downtrends, and sideways trends. Each of these trend types presents unique characteristics and trading opportunities.
- Uptrends: An uptrend is characterized by a sequence of higher highs and higher lows in asset prices, reflecting a market in a state of progressive ascent. This phenomenon indicates a prevailing sentiment of optimism among investors, often spurred by positive macroeconomic indicators, favorable corporate earnings reports, or other catalysts that instill confidence in the market’s future trajectory. In an uptrend, the demand for assets outpaces supply, propelling prices upward. Recognizing the onset of an uptrend and strategically positioning one’s portfolio to capitalize on this upward momentum is a quintessential aspect of trend following.
- Downtrends: Conversely, a downtrend is marked by a series of lower highs and lower lows, signifying a market in decline. This trend typifies a period of pervasive pessimism, where negative factors such as economic downturns, geopolitical unrest, or disappointing corporate performances dominate market sentiment. In a downtrend, the supply of assets exceeds demand, leading to a depreciation in prices. Astute trend followers perceive downtrends not merely as threats but as opportunities to profit through short-selling strategies or by reallocating investments to more stable asset classes.
- Sideways Trends: Sideways, or horizontal, trends occur when an asset’s price moves within a relatively stable range without a definitive direction. This pattern indicates a market equilibrium where supply and demand are closely balanced, often reflecting a period of uncertainty or consolidation. Recognizing a sideways trend is crucial, as traditional trend-following strategies may yield limited results in such market conditions, necessitating alternative approaches or a more cautious stance.
- Price Patterns: Price patterns are formations created by the fluctuations of an asset’s price on a chart. These patterns, such as head and shoulders, triangles, or flags, can offer predictive insights into future price movements. For instance, a head and shoulders pattern may signal a reversal from an uptrend to a downtrend. Mastery of pattern recognition enables investors to anticipate potential market shifts, positioning themselves advantageously in response to emerging trends.
- Moving Averages: Moving averages are pivotal in smoothing out price data to discern a clearer trend direction. By averaging the prices of an asset over a specific time frame, be it short-term (like a 10-day moving average) or long-term (like a 200-day moving average), these tools help identify underlying trends amidst market noise. A common strategy involves observing the crossovers of short-term and long-term moving averages, which can indicate potential bullish or bearish market turns.
- Trendlines: Trendlines are straight lines drawn on price charts, connecting a series of highs or lows. In an uptrend, a trendline is drawn along the higher lows, and in a downtrend, it is drawn along the lower highs. These lines not only help in identifying the prevailing trend but also in determining potential areas of support and resistance. A breach of a trendline may signal a weakening trend or an impending trend reversal, offering key insights for timely investment decisions.
A profound comprehension of market trends and their characteristics is vital for successful trend following. By skillfully employing these analytical tools, investors can navigate the complexities of market dynamics, making informed decisions that align with the prevailing market sentiment.
The Principles of Trend Following
Trend following, a strategy steeped in the art of precision and the science of probability, is governed by a set of fundamental principles. These tenets form the bedrock upon which successful trend-following strategies are built, ensuring that traders navigate the tumultuous waters of the financial markets with acumen and foresight.
Go with the Flow: Trading in the Direction of the Trend
The cardinal rule of trend following is encapsulated in the maxim: “Go with the flow.†This principle advocates for aligning trades with the prevailing market trend. The rationale is straightforward yet profound: it is more probable to garner profits by riding the existing momentum of the market rather than going against it. By identifying and aligning with uptrends or downtrends, traders increase their chances of success, capitalizing on the market’s inherent tendencies to persist in a particular direction. This approach eschews the precarious endeavor of predicting market reversals or timing market tops and bottoms, instead embracing the pragmatic strategy of trend alignment.
Risk Management
Integral to the fabric of trend following is an unyielding commitment to risk management. This discipline is the bulwark against the capriciousness of markets, designed to preserve capital and sustain trading longevity.
- Position Sizing: Position sizing is a critical aspect of risk management, dictating the amount of capital allocated to each trade. The goal is to size positions in a manner that balances the potential for profit with the risk of loss. This involves calculating the optimal trade size based on the volatility of the asset and the trader’s risk tolerance. A prudent position-sizing strategy ensures that no single trade jeopardizes the trader’s portfolio, allowing for the absorption of losses without derailing the overall investment strategy.
- Stop Losses: The use of stop losses is another cornerstone of risk management in trend following. Stop losses are predetermined exit points that automatically close a trade at a specific price level, thus limiting potential losses. These are set at levels where the initial rationale for the trade is invalidated, signaling a potential trend reversal or an erroneous trend identification. By implementing stop losses, traders enforce a disciplined approach to cutting losses, safeguarding their portfolios from significant drawdowns.
Avoiding Emotional Decisions
In the realm of investing, emotions are often the nemesis of rational decision-making. Trend following, with its emphasis on systematic analysis and rule-based trading, seeks to mitigate the influence of emotional biases. Emotional decisions, such as fear-driven selling at market bottoms or greed-fueled buying at market tops, are antithetical to the principles of trend following. By relying on objective indicators and predefined strategies, traders insulate themselves from the psychological pitfalls that often ensnare market participants. This detachment from emotional reactivity enables traders to make decisions that are aligned with their long-term investment objectives and market realities.
The principles of trend following coalesce to form a robust, disciplined approach to trading. By adhering to these tenets, traders can navigate the complexities of financial markets with a strategy that is grounded in logical analysis, risk mitigation, and emotional equanimity. This approach, while not without its challenges, offers a path to consistent, long-term success in the ever-evolving world of investing.
Trend Following Strategies
In the arsenal of a trend follower, a variety of strategies and tools are employed, each with its unique methodology and theoretical underpinnings. These strategies, when applied judiciously, can harness the momentum of market trends, leading to potentially lucrative outcomes. We will explore some of the quintessential strategies in trend following: Moving Average Crossover, Breakout Trading, Donchian Channels, Parabolic SAR, and the application of the Relative Strength Index (RSI) in trend following.
Moving Average Crossover
The Moving Average Crossover strategy is a linchpin in trend following, renowned for its simplicity and efficacy. This strategy employs two moving averages of different timeframes – a shorter-term average and a longer-term average. The basic premise is that when the shorter-term average crosses above the longer-term average, it signals the commencement of an uptrend, suggesting a buying opportunity. Conversely, when the shorter-term average crosses below the longer-term average, it indicates the onset of a downtrend, signaling a potential selling or shorting opportunity. This method exemplifies the trend follower’s creed of responding to what the market is doing, rather than attempting to predict future movements.
Breakout Trading
Breakout trading is a dynamic strategy that focuses on identifying and capitalizing on significant price movements that breach predefined resistance or support levels. A breakout typically indicates a strong momentum in the market, suggesting a potential continuation of the trend. Traders implementing this strategy place trades when the price moves beyond a certain threshold – a high or low that the asset has not surpassed in a significant period. The effectiveness of breakout trading lies in its ability to capture the early stages of a trend, thus maximizing the potential for profit.
Donchian Channels
Developed by Richard Donchian, the Donchian Channels strategy is a trend-following approach that utilizes a channel created by the highest high and the lowest low of an asset over a set number of periods. The channel consists of three lines – the upper line, the lower line, and the middle line, which is the average of the two. A typical application of this strategy involves initiating a buy position when the price breaks above the upper channel line, indicating an uptrend, and a sell position when it breaks below the lower channel line, indicating a downtrend. This strategy provides a clear, visual representation of the market’s volatility and trend direction.
Parabolic SAR
The Parabolic SAR (Stop and Reverse) strategy, devised by J. Welles Wilder Jr., is designed to determine the direction of an asset’s momentum and pinpoint potential reversals. The system places dots on a chart that indicate potential stop and reverse points, hence the name ‘SAR’. In an uptrend, the dots are below the price bars and move upwards, signaling bullish momentum. Conversely, in a downtrend, the dots are above the price bars and move downwards. The Parabolic SAR is particularly effective in markets with a strong trend, offering clear signals for entry and exit points.
elative Strength Index (RSI) in Trend Following
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements, typically over a 14-day period. In the context of trend following, the RSI can be used to identify overbought or oversold conditions. An RSI reading above 70 is typically considered overbought, while a reading below 30 is considered oversold. However, in trend following, these traditional thresholds can be adjusted to align with the prevailing market trend. For instance, in a strong uptrend, an RSI level of 70 may not necessarily indicate an imminent reversal, but rather the strength of the ongoing trend.
In conclusion, these trend following strategies offer a spectrum of tools for traders to harness market trends effectively. Each strategy, with its unique characteristics and methodologies, contributes to the nuanced art of trend following. The judicious application of these strategies, combined with a rigorous risk management framework, forms the bedrock of successful trend following in the volatile realm of financial markets.
Technical Analysis Tools for Trend Following
In the domain of trend following, the utilization of technical analysis tools is indispensable. These tools provide the means to decipher market psychology, gauge momentum, and identify potential entry and exit points. Among the plethora of technical instruments available, certain tools stand out for their efficacy in trend-following contexts: Candlestick Patterns, Fibonacci Retracement Levels, MACD (Moving Average Convergence Divergence), and Bollinger Bands. Each of these tools offers unique insights into market dynamics, and when used synergistically, they can significantly enhance a trader’s ability to follow and capitalize on market trends.
Candlestick Patterns
Candlestick patterns, originating from Japan, are a form of financial chart representation that offers an in-depth view of price movements. Each candlestick provides visual cues about the opening, high, low, and closing prices of an asset within a specific timeframe. In the context of trend following, certain candlestick patterns serve as harbingers of potential trend reversals or continuations. For example, a ‘Bullish Engulfing’ pattern may indicate a forthcoming uptrend, while a ‘Bearish Engulfing’ pattern could signal an impending downtrend. Mastery of candlestick patterns allows traders to interpret market sentiment and make informed decisions based on the emotional state of the market participants.
Passive Investors Are Trend Followers
Passive investors in equities are trend followers who do not try to minimize drawdowns with tactical models.
In the realm of investing, the majority of concepts are based on convention, much like in science. Objectivity about definitions and rules is more of a matter of convention than a law of reality.
Henri Poincaré (29 April 1854 – 17 July 1912) was a French physicist, mathematician, and philosopher, also known as a polymath, who made many valuable contributions to science. Two of the most important were chaos theory and topology. He was also a proponent of conventionalism. He believed that even laws, such as Newton’s, were suitable conventions based on assumptions.
Although academia and practitioners have proposed laws in finance and trading, as it turns out, much is a matter of convention. For instance, attempts have been made to distinguish between passive investing and market timing, yet no universal rule exists to permit this. In fact, we can consider a passive investor in the stock market a trend-follower who is not interested in tactical models and limiting drawdowns. How people define the difference is a matter of convention, and these conventions may vary according to perceptions and objectives.
Someone asserted that subtracting the beta performance—in this case, the buy-and-hold performance of the passively held IVV ETF—should adjust the performance of RSST. However, note that the post referred to managed futures and trend-following ETFs. In the case of RSST, we can assume that the passive investment in IVV is the result of a trend-following model with an extra slow moving average, such as a 60-, 120-, or even 240-month moving average, which will almost never trigger a switch.
This is not a trick designed to impose conventionality and avoid adjusting the RSST performance by subtracting the IVV buy and hold performance.
Passive investors essentially follow trends, as they only make long-term investments in a market if they believe the trend will continue upward. Therefore, in the case of passive investing, theoretically, the period of the moving average is infinite, but in practice it is finite, because at some point even passive investors exit the market. In fact, passive investing is a limiting case of long-only trend-following. Although passive investors follow trends, they do not prioritize minimizing drawdowns and beta. Instead, they often view market corrections as an opportunity to average down. This reinforces the notion that some passive investors belong to a different class of market timers.
In conclusion, conventions have a significant influence on the fields of finance, investing, and trading. Some people refer to passive investors as unsophisticated, but this may be far from the truth. Some other people think that trend-following means making frequent adjustments to exposure, but in some cases it may take decades, and the process could still be tactical.
Having an open mind about finance, investing, and trading could open new avenues and improve performance. Often this is difficult because various actors attempt to enforce conventions that suit them, but as soon as one realizes that those are simply definitions, new possibilities could emerge.
5 popular investment trends for 2025
Seasoned investors often approach markets with a long-term view, using short- and medium-term volatility to buy into the themes they believe will profit over many years. While identifying these trends is difficult, tuning out the noise can help you focus your portfolio on the winners, possibly resulting in significant gains.
Here are five of the most popular trends right now — including several themes showing significant growth potential in 2025.
1. Cryptocurrency
After smashing records with the successful launch of the first spot Bitcoin ETFs in 2024, the crypto market has entered a new era. Many institutional investors, hedge funds and investment advisors have dived into crypto ETFs, and this growing adoption is poised to create steady, long-term demand for digital assets.
Looking ahead, the spotlight is shifting to the potential approval of spot ETFs for tokens like XRP, Solana, Litecoin, and Hedera in the U.S. However, cryptocurrency exchange Coinbase predicts that institutional demand will likely remain concentrated on a few ETFs, such as Bitcoin and Ethereum, in the near term.
This year could bring even more changes to the crypto ETF landscape. With a new appointee selected to run the Securities and Exchange Commission (SEC), there have been rumblings of introducing staking, which could boost rewards for ETF holders, making these products even more appealing to investors.
Meanwhile, after years of regulatory uncertainty, the U.S. is welcoming its most crypto-friendly Congress ever. With bipartisan, pro-crypto majorities in both the House and Senate, Coinbase anticipates that favorable regulations could fuel crypto’s momentum in 2025.
Despite these tailwinds, cryptocurrency remains a risky asset class, and experts recommend allocating no more than 5 to 10 percent of your portfolio to it.
2. Energy stocks and ETFs
Artificial intelligence has been the stock market’s darling for over two years, with companies like Nvidia and Broadcom delivering explosive growth and massive returns for investors. But while AI grabs the headlines, powering this technological revolution is an equally compelling investment story.
JPMorgan predicts that companies in the industrial and utilities sectors — those supplying the physical infrastructure and energy needed for AI — are poised for significant growth. As AI’s demand for power continues into 2025, these sectors may offer long-term opportunities for investors seeking exposure to the AI-driven economy.
For investors eager to tap into this growth, broad infrastructure funds and power generation companies — along with the best-performing energy stocks and energy ETFs — may be strategic plays to consider as the energy sector powers up for the next phase of AI expansion.
3. Small-cap stocks
High-profile large-cap tech stocks such as Nvidia and Microsoft got all the attention in 2023 and 2024, helping to drive the Nasdaq and S&P 500 indexes to new all-time highs. While investors scrambled to own these momentum stocks, they mostly shunned small-cap stocks, leading to lackluster performance from these smaller companies.
Now with more attractive relative valuations, small-cap stocks have caught investors’ interest again. Some of the best small-cap stocks offer high growth and attractive markets, even if they don’t have the deep pockets and established markets of the large caps. So investors are again looking into these lesser-known names for opportunity.
Investing in individual small caps requires a long-term perspective and a lot of research to understand the industry and the opportunity. Plus, small caps tend to be riskier than larger companies because they just don’t have the same level of resources. So investors looking to ride the small-cap wave may be well served by buying some of the best small-cap ETFs instead.
4. REITs
While interest rates remain elevated for now, investors are anticipating them to decline in the year ahead. And this means that sectors that have been hurt by higher rates, such as real estate investment trusts (REITs), may be poised for a rebound in the year ahead as rates fall.
REITs offer the ability to own real estate without all the headaches of actually managing it yourself. REITs enjoy significant tax advantages, most notably the ability to avoid tax at the corporate level in exchange for paying out most of their income as dividends. So REITs often offer among the highest dividends of any industry.
Publicly traded REITs are among the best types of REITs to invest in, because they offer high yields, low overall management costs and the scrutiny of public investors. As mentioned, with interest rates likely to fall in 2025, a key cost for REITs is poised to fall, too.
Those looking to own a fund instead of digging into the details of individual REITs should check out the best REIT ETFs and be sure to avoid some of the worst REIT investing mistakes.
5. Dividend stocks
Heading into 2024, many experts expected interest rates to drop — and they did. The federal funds rate now sits at 4.25 percent, down from its high of 5.25 percent during the first half of 2024. In 2025, more rate cuts are likely on the horizon.
While cash can be a safe haven and even a solid income source in a high-interest-rate environment, its appeal dims as rates fall.
As cash and Treasury bill yields decline, many investors will seek new income streams. One opportunity in 2025 that can still provide income is dividend-paying stocks.
These equities, often trading at a discount to the broader market, also tend to be less volatile — exhibiting about 80 percent of the market’s overall volatility, according to JPMorgan. That makes dividend stocks and dividend ETFs a compelling option for investors aiming to balance risk and reward.
Cash remains essential for daily needs, but it’s not built to outpace inflation or generate long-term growth. For that, stocks shine. Low-cost index funds are an easy way for investors to gain exposure to stocks of the country’s largest companies.
The Safe-Haven Investment Savvy Investors Swear by—6 Big Perks
In economic uncertainty, smart investors look for assets that provide stability and long-term security. While stocks and real estate can be unpredictable, gold is a trusted safe-haven investment that holds value through market shifts.
With inflation rising and financial markets fluctuating, gold offers unique advantages that protect and grow wealth. From hedging against inflation to diversifying portfolios, gold remains a key asset for investors looking to safeguard their future.
Here are six major perks of gold as a safe-haven investment and why it continues to be a smart choice for building financial security.
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1. Gold Preserves Wealth During Economic Downturns
Unlike stocks and real estate, gold is not tied to the performance of the economy. During recessions or financial crises, investors flock to gold because it retains its value when other assets decline. This makes it an excellent hedge against market volatility and a reliable way to preserve wealth in uncertain times.
Because gold tends to move independently of stocks and bonds, it can help stabilize your portfolio during economic downturns. This makes it a safe-haven asset, offering protection when traditional investments struggle. By allocating a portion of your portfolio to gold, you create a built-in safeguard that helps maintain long-term financial security. Gold’s historical track record of maintaining value makes it an attractive option for those looking to diversify beyond traditional stocks and bonds.
Pro Tip: If you’re looking to protect your retirement savings from market swings, diversifying with gold can offer long-term stability. Precious metals have served as a hedge against inflation and economic downturns for centuries. Explore diversification options like precious metals investments, with opportunities to receive up to $15,000 in free metals through qualified purchases. If you’re over 50 and curious about investing in gold, now is a great time to get your FREE 2025 Gold Information Kit and protect your future with physical precious metals!
2. Gold Protects Against Inflation
Inflation erodes the purchasing power of cash, but gold historically increases in value when the cost of living rises. Unlike paper currency, gold has intrinsic value, meaning it holds its worth even as fiat money weakens. This makes it a powerful tool for long-term financial security.
As a hedge against inflation, gold helps preserve your wealth by maintaining its purchasing power even when traditional currencies lose value.
Quick Tip: Consider adding physical gold or gold-backed assets to your portfolio to counterbalance inflation risks.
3. Gold Provides Portfolio Diversification
A well-diversified investment strategy helps reduce risk and stabilize returns, and gold is a key asset for diversification. Since gold often moves opposite to stocks and bonds, it can help balance your portfolio and minimize overall losses during market downturns.
Diversifying your portfolio with gold helps balance risk by ensuring your wealth isn’t solely dependent on the stock market or other volatile assets. Working with a trusted gold investment provider ensures you’re getting high-quality assets and expert guidance tailored to your financial goals.
Whether you choose physical gold, ETFs, or gold-backed IRAs, partnering with a reputable source can help you make informed decisions and maximize your investment potential. Taking this strategic approach strengthens your financial security, especially during economic downturns. As inflation rises and markets fluctuate, holding gold can provide long-term stability and peace of mind for investors looking to protect their hard-earned wealth.
Pro Tip: A well-diversified retirement portfolio should include assets that hedge against inflation and economic uncertainty. Precious metals have a proven track record of holding value over time. Explore diversification options like precious metals investments, with opportunities to receive up to $10,000 in free metals through qualified purchases. If you’re over 50 and curious about investing in gold, now is a great time to get your FREE 2025 Gold Information Kit and protect your future with physical precious metals!
4. Gold Is a Tangible Asset With No Credit Risk
Unlike stocks, bonds, or even cryptocurrency, gold is a physical asset that you can hold in your hand. It’s not reliant on corporate performance, interest rates, or government policies, making it a low-risk option in times of financial instability. Plus, gold can’t be hacked or erased, providing a sense of security that digital investments lack.
This tangible nature makes gold a trusted store of value, especially during economic uncertainty, when digital and paper assets may face volatility.
Quick Tip: Store physical gold in a secure location, such as a home safe or a professional depository, for added protection.
5. Gold Has Global Demand and Liquidity
Gold is recognized and valued worldwide, making it one of the most liquid investments available. Whether you hold gold bars, coins, or ETFs, you can easily convert it into cash in nearly any country. This global demand ensures that gold remains a valuable asset in any economic climate.
Starting your gold investment with a bonus sign-up offer can give you an instant advantage, adding more value to your portfolio from day one. Choosing investment options like gold-backed ETFs or smaller denomination gold bars makes liquidation easier when you need quick access to cash. By working with a trusted provider, you ensure smooth transactions and the flexibility to sell your gold when market conditions are favorable. Having a diversified approach to gold ownership allows you to adapt to different financial situations, whether you’re preserving wealth for retirement or preparing for unforeseen expenses.
Pro Tip: Gold has long been a go-to asset for investors looking to preserve wealth and maintain liquidity. If you’re over 50, now is a great time to explore precious metals investments and receive up to $15,000 in free metals through qualified purchases. A well-balanced portfolio includes assets that can be easily converted into cash when needed. Get started today with your FREE 2025 Gold Information Kit and protect your future with physical precious metals!
6. Gold Offers Long-Term Stability
Gold has stood the test of time as a reliable asset for centuries, consistently maintaining its purchasing power. While other investments rise and fall with economic cycles, gold has a history of stability and long-term value. Adding gold to your portfolio ensures that part of your wealth remains protected for future generations.
Quick Tip: Consider allocating 5-10% of your investment portfolio to gold to add stability without overexposing yourself to a single asset class.
Strengthen Your Portfolio With Gold
A strong portfolio isn’t just about growth but protection and stability. Gold has proven its worth as a safe-haven asset, helping investors hedge against inflation and market downturns.
While economic conditions change, gold remains a reliable way to preserve wealth. Adding gold to your portfolio creates a financial cushion that withstands uncertainty and strengthens your long-term financial security.
Now is the time to explore gold as a strategic investment. When the economy fluctuates, stability matters more than ever.
How to Start Investing in 2025: A Beginner’s Guide
Watching the news these days can seem like a wild ride on one of those sketchy roller coasters at the county fair. The economy? Uncertain. The housing market? Anything but normal. The stock market? Who knows . . .
You might feel like it’s a crazy time to start investing, but hear us out: The best time to get control of your finances and start saving for the future is today!
Trying to figure out the where, when, and how of investing can feel like rocket science, but it’s a lot easier to get in the game than you think.
Let’s look at everything you need to know to get started with investing. We’ll go through a step-by-step plan you can follow to get in the game and set yourself up for success at the investing starting line. Welcome to Investing 101!
How to Start Investing in 7 Steps
Starting anything new can be intimidating—especially when it’s something that can have long-term effects on your finances—but don’t give up. Anyone can invest . . . including you. Here are seven easy-to-follow steps (along with some investing basics) to help you get started.
- Set your investing goals.
- Figure out how much you’re going to invest.
- Choose your investing accounts.
- Choose your investments.
- Pick an investment strategy.
- Open an investing account.
- Work with a pro and keep learning.
Let’s get started!
1. Set your investing goals.
We’ve always said one of the keys to getting out of debt is knowing your why. Why are you getting out of debt? What’s the big, specific goal you have that’s driving you to kick debt to curb? Having a definite reason for getting out of debt gives you a finish line to look forward to in your race to financial freedom.
That’s also true for investing—the key to starting your investing journey on the right foot is being clear about your goals. Why do you want to start investing? Is it to build your retirement? To pay for your kids’ or grandkids’ college? To save a down payment for your first house?
Getting clear on why you want to invest your hard-earned money will help you with the next step, which is to . . .2. Figure out how much you’re going to invest.
retirement savings (or in your short-term savings as well), and research
shows it’s the most important factor in successfully saving for
retirement.
If you’ve been following the 7 Baby Steps to get out of debt and build wealth, you know that in Baby Step 4, we recommend investing 15% of your gross income toward retirement.
Why 15%? Because there are other goals you need to set money aside for at the same time you’re investing—like paying off your home early or saving for your kids’ college fund. Just remember, when it comes to juggling college savings and your own retirement goals, saving 15% of your income for retirement comes first.
Think about it: If you invest 15% of your income every year for 30 years (assuming an average 11% return rate), that adds up to literally millions of dollars because of the miracle of compound growth. Pretty neat, huh?
With all those debt payments kicked to the curb in Baby Step 2, you’ll be able to throw that 15% at your retirement without blinking an eye. Just program your paycheck to remove that 15% automatically and you won’t even miss it. Then you can get a clearer picture of how much you want to invest for the kids’ or grandkids’ education, or your other short-term savings goals.
3. Choose your investing accounts.
The next step is to decide where to invest your money. And you’ve got plenty of investing account options—aka investing vehicles in financial speak.
Different types of investing vehicles (like IRAs or 529 college savings funds) are made for different investing goals.
Retirement Accounts
When it comes to saving for retirement, there’s a simple rule of thumb to keep in mind—match beats Roth beats traditional. Here’s how that might play out:
- If you have a match through your workplace retirement plan, start with your 401(k) and invest enough to at least receive that full employer match.
- After that, you (and your spouse, if you’re married) can open a Roth IRA and max out your contributions there.
- If you stillÂhaven’t hit 15% after you max out your Roth IRA, just go back to your 401(k) and bump up your contributions until you do.
This is the tried-and-true process that thousands of Baby Steps Millionaires followed to build their seven-figure net worth—and it’ll work for you too!
Now, if you’re self-employed or a small business owner and don’t have access to a 401(k), don’t worry. You can still save for retirement with a SIMPLE IRA or SEP IRA:
- A SIMPLE IRA plan makes it easy to save for your own retirement while also contributing to your employees’ retirement savings.
- A SEP IRA is another retirement plan option for small-business owners or self-employed folks. But unlike a SIMPLE IRA, which lets employers and employees contribute to the plan, only employers are allowed to contribute to SEP IRAs on behalf of their employees.
Education Savings Accounts
Once you’re investing 15% of your income for retirement, you’re ready to start saving for your children’s college fund (that’s Baby Step 5). But remember, your retirement comes first.
Here are two of the most popular investing options for college savings and why we recommend them (or not):
- 529 Savings Plan: A 529 savings plan is a tax-advantaged account that lets you set aside money for educational expenses. And if your child or grandchild decides to skip college, no problem. With a 529 plan, you can roll over any unused money into a Roth IRA for the plan’s beneficiary (if you meet several qualifications).2
- Education Savings Account (ESA): An ESA is a trust or custodial account that lets you invest money to pay for someone else’s education.
ESAs are different from 529 plans in a few important ways. First, ESAs have a contribution limit of $2,000 per child per year, while there’s virtually no limit on 529 plan contributions.3 And with an ESA, you can choose almost any kind of investment, including our number one recommendation—mutual funds.
Short-Term Investing Accounts
Okay, folks. If you’re looking for ways to save and grow your money short-term, you can look at index funds or a money market account:
- Index Funds: Index funds are types of mutual funds designed to mirror a market index like the Dow Jones or S&P 500. The longer you keep your money in an index fund, the more likely you are to see growth. That makes index funds a great option for growing your savings for a down payment or buying your first rental property, as long as you’re not planning to use that money for at least five years.
- Money Market Account (MMA): Money market accounts are great options for low-risk, short-term savings. This is a place for money like your emergency fund or savings you plan to use in five years or less. But keep in mind that the interest you’ll earn likely won’t keep up with inflation, so that makes it a bad choice for a long-term investment.
4. Choose your investments.
Once you know what kind of investing account to open, you’ll need to pick your actual investments.
There are many types of investments to choose from, but good growth stock mutual funds are the best way to invest for long-term, consistent growth. Here’s why.
A mutual fund is an investment that pools money from a group of people to buy stocks in different companies.
Unlike ETFs and index funds, mutual funds are actively managed, meaning an investment professional makes decisions about how to invest the fund’s money. Also, there are thousands of mutual funds, which means you can choose funds that have a long history of outperforming other funds in their category.
What types of mutual funds should you pick? Great question. Let’s talk about how to build your investment strategy with mutual funds.
5. Pick an investment strategy.
Like we said earlier, good growth stock mutual funds are the best way to invest for long-term, consistent growth.Why is that?Because they let you spread your investment dollars across dozens (or even hundreds) of company stocks—from the largest and most stable to the newest and fastest growing.
Spreading your money around like this is part of an important investing principle called diversification, and it helps you avoid the risks that come with buying single stocks.
Ever heard the expression, “Don’t put all your eggs in one basket� Well, mutual funds put your eggs in many different baskets. And we recommend spreading those eggs out even more by investing in four types of mutual funds:
- Growth and income (large-cap funds)
- Growth (mid-cap funds)
- Aggressive growth (small-cap funds)
- International
Yep, it’s that simple! Keeping your portfolio balanced with these four types of funds can help you minimize your risk and still take advantage of the returns the stock market can offer.
If you’re confused about your fund options, talk to a financial advisor or investment professional. They can help you make sense of the details so you can feel confident about how you’re investing your money.
6. Open an investing account.
Whew! We’ve been laying out our investing choices and strategy, so now it’s time to actually open an account and start making contributions!
So where do you even start? It’s actually pretty simple. Just remember: Match beats a Roth beats traditional. Here’s how it works:
- Start with your workplace plan. Most employers offer a match when you invest in your workplace retirement plan—a 401(k) or Roth 401(k) for most people. If you don’t have a Roth option, invest up to the match in your 401(k), then skip to the next step. If you do have a Roth option and you have a selection of good growth stock mutual funds to choose from, you can invest your entire 15% at work and you’re done.Â
- Open a Roth IRA. Like we said before, the Roth IRA is the rock star of retirement plans. You can invest in the best mutual funds, and you won’t have to pay taxes on the growth in the account when you use it in retirement. Max out a Roth IRA for yourself and your spouse if you’re married.Â
- Go back to your workplace plan. If you’ve maxed out your Roth IRA and you still haven’t reached your 15% goal, bump up your contributions to your 401(k) until you do.
It’s super easy to start investing in your employer-sponsored retirement plan, like a 401(k) or 403(b). Here’s how to open an account:
- Check with your HR department to see if you’re eligible. A lot of companies will allow you to enroll as soon as you’re hired, but some require you to hit the one-year mark before you become eligible.
- Fill out any required paperwork and submit it to HR online or in person.
- Pick and choose your investments.
- Set up automatic contributions.
Opening a Roth IRA is just as easy:
- Set up an account online with help from an investment professional.
- Fill out that pesky paperwork.
- Pick and choose your investments.
- Set up automatic contributions.
Your investment professional can also help you open an account and choose your investments to save for your kid’s college. And once your house is paid off, you can work toward maxing out your tax-advantaged retirement accounts.
7. Work with a pro and keep learning.
The last step to set yourself up for investing success is to actually start investing. Don’t let the economy or the scary, exaggerated news about everything that’s wrong with the stock market or the housing market keep you from getting on board. Instead, get with an investing expert who can give you real knowledge and guidance about starting your investing journey.
You’ll have lots of questions—it’s a given. “Which are the best funds to choose?†“How do I manage my 401(k) or set up a Roth IRA?†Your investment professional can show you how to start investing and answer all your questions so you can make the best decisions possible for your retirement savings.
The right investment professional will:
- Educate you on investment choices so you stay in the driver’s seat
- Help you keep your investments on track with regular check-ins
- Offer a client-first approach
When Should I Start Investing?
Before you start investing, you need to work your way through the first three of Ramsey’s 7 Baby Steps. That means saving $1,000 for a starter emergency fund, paying off all your debt except your mortgage using the debt snowball method, and then saving a fully funded emergency fund of 3–6 months of expenses.
If you’re new to the 7 Baby Steps, no problem! Simply put, it’s a plan millions of people have followed to get out of debt and start building wealth for retirement. Let’s break it down:
- Step 1:Â Save $1,000 for your starter emergency fund.
- Step 2:Â Pay off all debt (except the house) using the debt snowball.
- Step 3: Save 3–6 months of expenses in a fully funded emergency fund.
- Step 4:Â Invest 15% of your household income in retirement.
- Step 5: Save for your kids’ college fund.
- Step 6:Â Pay off your home early.
- Step 7:Â Build wealth and give generously!
Here’s the deal—your income is your most important wealth-building tool. And as long as it’s tied up in monthly debt payments, you can’t build wealth. It’s like trying to fill a bucket with water when there’s a hole in the bottom—it just doesn’t work.
By building a debt-free foundation and stashing a good chunk of savings in the bank, you’re setting yourself up to build wealth the right way.
In fact, there’s a whole group of millionaires called Baby Steps Millionaires who’ve followed the 7 Baby Steps to hit the million-dollar mark. On average, they paid off all their debt and reached a million-dollar net worth in about 20 years.4
Connect With an Investment Pro
As you start investing and working with a pro, keep this in mind: Never invest in anything you don’t understand. It’s your money! Ask as many questions as you need to and take charge of your own investing education.