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2018-03-15T10:45:00+00:00

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4 types of investments tools to avoid

These instruments are much more like to bring tears to your eyes than tangible results

First of all, investing is a way of generating income. The latter, in turn, is associated with positive emotions. However, there is a number of popular investment tools that more often than not bring frustration, not joy. In this article, we will tell you about possibly the worst investment tools and the reasons why you should keep away from them.

Binary Options

The probability theory is against you-you are doomed to lose in the long run.

A binary option is an asset that, depending on the performance of agreed condition at a specified time, either provides a fixed amount of income (premium), or does not bring anything. There are only two event scenarios, hence the name. As a rule, the investor will receive profit after making a correct prediction on the future price movement, which can go either up or down. Predicting (not guessing) the price change is almost impossible since all the investments in binary options are short-term. Deals take from one minute to a day. As we all know, asset prices can fluctuate considerably during the day, and not always for fundamental reasons that can be predicted. Even the most insignificant price fluctuations can make or break the deal, as binary brokers take into account changes in the thirds and fourth decimal places. If the asset was worth $1,001 and then went up to $1,002, and you bet on a price increase — congratulations, you’ve won. Otherwise, you would have lost the entire investment.

Binary options are, in fact, a sort of gambling. As a trader you do not make deals with other market participants, rather you are trading with the «broker» himself. Chances to get income, in the long run, are close to zero and here's why. Profit percentage for successful deals is usually set at 85%, sometimes higher. In case of a loss-making deal, you will lose 100% of the invested funds. That is, by investing $100 and winning, you will receive $185. However, when losing, you will receive $0 and lose the initial investment. Even when closing half the deals in the green, the trader will still lose money due to 85% profitability.

If you are lucky enough to win, the profitability of binary options trading, in the long run, is still an illusion.

To stay afloat with 85% profitability, the trader will have to win 54% of all deals, which is statistically improbable. The number of transactions that you will need to win in order to not lose your money, is calculated using the following formula:

Y = 1 / (1 + X),

where Y is the win rate, and X is the profitability of the option.

Forex

It seems simple, but only the pros can make money here.

Forex is an international market where national currencies act as commodities and the exchange rate is determined by the supply and demand ratio. Of course, you can earn money on Forex, and earn a lot. However, only 8% of all Forex newcomers can boast making it past the first deals. The question then arises: what happens to the remaining 92% if the chances of success are so high? Everything about Forex is ambiguous. First, it is extremely difficult. To receive a steady income you will really need to become an expert (read «a professional»). Beginners who end up reading a couple of books and watching the millionaire-making video on Youtube will quickly be disappointed. The truth is that extensive training is required to trade currencies.

Forex opened on the phone

Even with outstanding financial and analytical capabilities, income is not guaranteed. Finding a reliable Forex broker is not easy. A huge number of companies, posing as Forex brokers, copy the business model of binary brokers. Traders would think they are making transactions on the exchange, while in reality, they would pay to the company itself, which of course doesn't want to lose its money. While an experienced trader can recognize a scam, it can be difficult for a beginner.

Trading with borrowed capital is another point that can undermine your Forex journey. Currency price fluctuations are usually insignificant. In order to get tangible results, it is necessary to invest a fairly large amount of money. If the trader doesn’t have such an opportunity, he can use leverage and trade with the help of borrowed funds. If you use the leverage of 1:100, then a $100 deal will bear the same results as if it was worth $10,000. It applies to both winnings and losses. Your prediction about currencies turned out to be correct? You get it all. The prediction turned out to be wrong? Your investments will depreciate at a much faster rate.

Unit investment trust funds (UITF)

Do you like it when somebody does your job? This is something you have to pay for.

Imagine you are a newbie and want to invest in securities but you don’t have the time to delve into the process. You then decide to turn to a professional intermediary. UITF is a management company that makes an investment on your behalf using your money, that receives a percentage of your profit as remuneration. This method is convenient and can be quite profitable. But there are several reasons to reconsider this investment opportunity.

A UITF always wants to be paid. This is why you will get less than you could, as the manager will get his share of your earnings. There are several commissions to be paid: entry commission (when buying the asset), and exit commission (when selling it). And don’t forget about the profit tax. In any case, your money is partially spent on someone else's salary. Maybe you think realtors are a waste of money? UITFs work exactly like this. Independent investment, just like an independent real estate deal, is always less expensive.

With some investment tools you can lose your money

The liquidity of investments in mutual funds is lower than the liquidity of the individual instruments (stocks, bonds, etc.). Time is the main reason for this. Shares that you own can be sold at any economically advantageous time. At the same time, shares that you own through an UITF can be turned into money only after a two-week period. Only after you sell the shares will you know how profitable the deal was.

This investment opportunity is not, in fact, that bad. However, if you are ready to invest, it's better to dive into the topic and act responsibly. In case of doubt, it is better to contact a financial adviser. UITFs should be left to those who invest substantial amounts of money and don’t have an hour or so to control their investments.

Bank deposits

Up till now no one has become a billionaire by simply depositing his money.

Even our grandparents are used to keeping their money in the bank. What could go wrong with this conservative method of investing? Recall the interest rate offered by banks on your deposit. Now, deduct the inflation. More often than not your income on deposits is barely enough to sustain the investment. If the interest rate is higher than the inflation, then you will at least protect your savings. Otherwise, you are simply losing money. This opportunity seems dubious even to rookie investors.

And what if the bank goes bankrupt? Of course, you will be compensated. But only after waiting long enough. It is also likely that the compensation amount will be less than the initial investment. Of course, there are banks that are very unlikely to go bankrupt. In such banks, the interest rate can be even lower. Banks are good at keeping your money. But they will not help you realize full financial potential. This is not the way to go for a serious investor.

Summed up

Questionable investment instruments are not the only way to lose your money or, if you are lucky, to invest them less efficient than possible. Shares can also not yield tangible returns or even become unprofitable when picking the wrong company. Don’t forget that there are not only bad investment tools but also bad investment decisions.

Investing is always subject to risk. Your task as an investor is to minimize it and get to the desired income. It is up to you whether to invest in binary options, Forex or UITFs. But don’t forget to take into account all possible losses, and don’t say we haven’t warned you 😇

About author
Product manager @Moneon. Working hard at solving puzzles of the world of finance, so you don't need to.
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