Tuesday, April 21, 2009

Investments To Avoid

Whether its stocks, options, mutual funds, ETFs, etc., there are many investment vehicles out there to put your money in. For the beginner or intermediate investor though, some of these options should just flat out be avoided. Unfortunately, people with a financial motive often try to dupe beginner investors into using some of these investments when it is generally against the novice investor’s interest.

Options: While advanced investors may be able to successfully use options to hedge investments or as leverage, options are a suckers game for beginning investors. The appeal of options is that the investor can quickly turn a small amount of money into a large amount of money. However, most of the time, the investor just loses most of or his entire investment if he doesn’t know what he is doing. When you are buying or selling a stock option, you are betting against someone else (whoever is on the other side of the trade). Most likely, this is someone with a lot more information and experience than you, so options are generally best avoided.

Mutual Funds That Charge Loads: Some stock brokers or bankers will try to get you into a mutual fund that charges a load (an upfront fee). This fee generally is just used as an advertising expense; basically, it just goes towards someone else’s commission. These loads can be very hefty, often 5% of your initial investment. There’s little evidence that mutual funds that charge loads do any better than mutual funds that don’t charge loads. If you are going to invest in mutual funds, there’s absolutely no reason to put your money in one that charges a load.

Penny Stocks:
This is another area where there is often a lot of fraud and stock manipulation. Penny stocks are often very risky. Many novices who invest in them do not really know what they are doing and may be buying a company at a lofty valuation, even though the stock looks ‘cheap’ at $.80 a share. Remember, it’s the P/E, P/S and other ratios that determine how ‘cheap’ a stock is, not the share price.

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