Risk tolerance

In order to know where to place your money, you need to know your risk tolerance first. If you are a risk taker, you can invest in stock, forex, or option. But if you are not a risk taker, you should only invest in bond, or mutual fund.

Each individual has their own risk tolerance. So your risk tolerance might be different from your friend’s risk tolerance. This means that you should not follow your friend’s investment without knowing his and yours risk tolerance. You should know your risk tolerance before investing.

Determining your risk tolerance involves several things. First, you need to know how much money you have to invest, and what your financial goals are.

For example, if you plan to retire in twenty years, and you do not have any savings, you need to have high risk tolerance to achieve your financial goal. This means you need to invest aggressively, which is risky. But you need to do this to meet your goals in a short time. On the other side, if you are still young you can invest slowly because you still have a lot of time. You can watch your money grow slowly over time.

Another example, a 70-year-old retired will generally have a lower risk tolerance than a 30-year-old executive. The old guy will make sure he is not taking too much risk. If he lose his money, he won’t be able to earn more because he’s not working anymore. The 30-year-old executive might have higher risk tolerance, because he has a longer time frame to make up for any losses he may incur.

From another view of point, you can find out your risk tolerance by looking at the amount of money you feel you can lose. If you invest $10,000 in stock, and lose 1% a day which is $100, are you comfortable with this. If yes, then you have high risk tolerance.

In the internet there are many test that you can take to know your risk tolerance. It will have several question designed to measure your ability to tolerate investment risks.

Learn where to invest money.

Invest money

Do you know where to invest your money? That is a million-dollar question. The answer will be different for each poeple. First you need to know your risk profile. Some people don’t like risk, and some don’t mind having some risk. This risk profile will determine where to put your money. If you like risk, then you can invest in riskier asset. Remember that the riskier it is, the higher return you will get. So if you don’t like taking risk, do not expect to get 20% a year return.

The most common place for people to invest money are stocks, bonds, mutual funds, real estate, gold, or starting their own business. Every investment has their own characteristic. It is your job to know the characteristic and match it with your risk profile.

Bond, real estate, and some kind of mutual funds generally have lower risk than other investment. Their return will be lower and it has little fluctuation. On the other hand stocks, option, forex or starting your own business is very risky. With stocks you can loss money in minutes. Do you know how much money you could lose when mortgage crisis happened in 2008? 50% drop in a year is so common that days. How about starting your own business? Guess what. It is riskier than investing in stock, especially if you do not have the skill to manage it.

If you know nothing about investing you need to get help soon. The easiest way is to invest in mutual fund. A mutual fund is a professionally managed type of collective investment. Although it is professionally managed, it does not means that you will not lose money. When economy in crisis, you will most likely lose your money too. The best fund manager beat the market. For example, when the market drop 5%, they will only drop 3%. And when the market rally 5%, they will make you 6% richer.

Learn more where to invest money or learn option trading

Stock Option

An option is a contract between a buyer and a seller on a securities. So stock option is a contract for a stock. There are two basic types of options, the American and European. Most exchange-traded options is an American option which is a contract that can be exercised at any time between the date of purchase and the expiration date. The other type of option is an European option. It is an option contract that can only be exercised on the expiration date.

There are two terms you need to know in option. The price at which an underlying stock can be purchased or sold is called strike price. Expiration date is when the option will expire where you need to execute the option or leave it worthless.

There are basically two reasons why people use stock option. The first is for speculation. Here people try to “guess” the direction of a stock’s movement, the magnitude and the timing of this movement. You will win money if your guess is right and lose money if you are wrong.

The second reason is for hedging or an insurance for stock. If you buy a stock, and are afraid that the stock will go down, then you can insure it using option. When the stock drop, you will gain from option. So by using options, you can limit your loss.

There are two basic option strategy, the Calls and Puts. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset. When you believe that a stock if going to be up next year, buy call option. But if you believe the price will go down next year, buy call option.

From this basic strategy, you can combine it to create a more complex strategy. For example you can buy two call option with different expiration date and price, and two put with different expiration date and price.

Free guide on stock option and option strategies.

Best penny stocks list

To get the best penny stock list, here’s what I do:

• First I open http://screen.yahoo.com/stocks.html. There I will find stock with these criteria: Share price 0-5, PEG 0 – 0.5, and Dividend 1%-20%.
• You probably get plenty of stock. So we will remove those stocks with this following criteria:

1. Current asset lower than current liability
2. High ROE(Equity return) larger than 20%
3. High OPM(Operating margin) larger than 25%
4. Low Debt/Equity lower than 30%

You will find those information by using this tool below (enter your stock code and click eQuote).