5 Investments You Should Never Make
Investing can be tricky, and there's always the the lure of making a fortune, or the fear of losing everything.
However, we've often touted investing as a financial tool anyone can use, given the proper introduction. Yet these five investments are typically seen as risky by many financial experts and as a rule of thumb, best for beginners to leave alone...
1. The Futures Market in Commodities
Trading in the futures market in commodities is a high-risk investment move that has the potential for even experienced investors to lose enormous sums of money.
Though professional traders have demonstrated that earning consistent returns is possible, many investors driven to the attraction of commodities are not knowledgeable enough regarding risk and trading strategies to achieve winning results.
Essentially, the stakes are very high in commodities -- futures are traded in highly leveraged contracts that involve a lot of give and take. The trader typically puts up 5 to 20 percent of the contract of the futures margin value in order to control the commodity investment, however, the commodity being traded (crude oil for instance) tends to move quickly and haphazardly. The reality is that the commodity can move for or against you in a matter of minutes.
So why invest at all? Individuals are driven by the thought of profiting from changes in the value and price of the commodities. Because they make a binding agreement to buy or sell a certain quantity of a commodity, at a specific price in the future, they will either prosper or be hit.
If the value of the commodities decreases, the investor is required to deposit more money into the account in order to keep the position open. If the value increases, the returns can be high, and typically speculators close their positions before the contract is due. Because commodities possess huge amounts of leverage, small price movements can mean that future accounts are wiped out or doubled in less than an hour.
Hot public offerings of stocks such as Facebook or Groupon debut to sky-high numbers on the first day of trading, but according to a study by the University of Florida, these stocks don't do as well when compared to other small-company stocks over the course of three years.
The potential to make money is a possibility, but typically those who rush for shares of hot websites pay exorbitant numbers to get their hands on stock, and don't earn very much.
An IPO is a company that has freshly gone from private (no general shareholders) to public. Companies opt to make the switch because of the funds they can raise by selling shares of their firm publicly.
Many investors rush to buy shares of an IPO because of its prevalence in headlines and popularity with the public. Investment underwriters also often frame IPOs as "once in a lifetime opportunities" because IPOs do only happen once for each company, so the masses are quick to get in on the action.
However, the hype is usually baseless, as IPOs later sell below their offering prices, meaning that individuals that have paid for their share at a premium were essentially ripped off by hedge fund managers pushing up the introductory price of the shares. (Continued on page 2)
3. Hedge Funds
Hedge funds are privately-owned, unregulated investment vehicles. Professional hedge fund managers pool investors' dollars to reinvest them into various financial tools and instruments in both domestic and international markets.
The goal of hedge fund runners is to generate high returns and outperform the market -- however, since managers use a wide assortment of high-risk strategies in the hopes of capitalizing on a potentially good move, the risk is great.
For instance, managers can bet on a change in direction in an attempt to cash in on a rising market. However, poor decisions and flawed bets can drain the fund.
Since the Securities and Exchange Commission does not regulate hedge funds, investors and regulators can't oversee the activities of hedge fund managers, and are hapless to a manager's decisions, which can bankrupt the fund.
4. Digital Currency
Digital currency is a category of currency that is gaining traction globally as a possibility to be used and legalized as tender in the future. The most popular example of this is the Bitcoin.
In November 2013, the price of one Bitcoin jumped to over $1,000, up from $15 in January! However, by Christmas Eve, the value had dropped to $700 from its ultimate high point of $1,242 in late November, demonstrating its volatility as an investment product.
Worldwide, the public, merchants, government, and financial institutions are split on the usefulness and potential of Bitcoins to be realized as a true form of payment in the future. According to CNBC , Though Germany has begun recognizing the Bitcoin as a "unit of account," Thailand has banned the currency entirely, and Norwegian authorities released a statement announcing that the country will not be recognizing Bitcoins as legal currency.
Though Bitcoin is still a hot new fad, there is no way of predicting how well it will do in the marketplace, and whether it will flourish and grow or eventually, run out of steam.
Though the Antiques Roadshow entices the flea market junkie in those of us who hoard our old memorabilia and family heirlooms, spending a lot on collectibles can be a drain on average Americans who are not knowledgeable buyers. In general, the average non-professional collectibles investor will find the market to be extremely slow moving, and financially lackluster. As a last note, however, if there were ever an investment product to put a few dollars into, this would be probably one of the least-costly.
The takeaway from this investment roundup is to be cautious before proceeding to invest on an impulse, whim, or "what if" mentality. There are exceptions to each of these that have resulted in major profits. However, if you want a quick summary of what investments you should never make, these five hit the mark.