Maximizing Investment Money

Stock market investing can be a confusing and unnerving process, but it doesn’t have to be this way. With the proper education, anyone with a cool head can learn to maximize profits in the public market. Short sales, options trading and penny stocks are often associated with high risk and get-rich-quick schemes, but handled properly are a legitimate way to leverage available capital.

For example, investing $100 dollars at a rate of 5% per year, compounded daily, will yield a return of $105.13, including the initial investment. This net gain of five dollars and thirteen cents isn’t much, and might not even be enough to justify spending the time. Indeed, some of the cheapest online brokerages charge three dollars per trade, meaning that one needs to net at least six dollars to break even. In this case, gaining a net of $5.13 is actually a loss of eighty-seven cents.

But, investing a higher amount, say a million dollars, into the same market will be worth the time, risk and brokerage fees. With a net return of $51,267.50, plus the initial million, a 5% return translates to a decent year’s salary for many Americans. Obviously, investing a larger amount makes a huge difference.

Options trading is a way to maximize the amount of money invested. Instead of spending money on actual stocks, an investor spends it on the option to buy the stocks. Perhaps a stock costs $100, and the option to buy it costs $2. The investor could buy fifty options to buy the stock with his hundred dollars, and if the stock rises 5%, the investor buys and sells immediately for profit. By buying the actual stock, the investor would make a little over five dollars, but by buying the options, he makes over $250. Subtract the cost of the fifty options and the investor comes out with a net profit of over $150.

Short selling stock is another way to maximize profits. With a buy-and-hold strategy, money can only be made when the market goes up. Over the long term, this is what happens, but a dip in the market always represents a monetary setback. When shorting, one can make money in a dip or a rise. The saying is “buy low; sell high”, and shorting is a way to sell stock before buying. The one danger to short selling is that if a stock goes up in value, the potential for loss is unlimited. If you buy a stock for $100, your potential gains are unlimited, and your potential loss is $100. If you short sell a stock for $100, your potential gains are $100 and your potential loss is unlimited (if the stock goes up).

Penny stocks are another way to invest. They are usually more risky than stocks priced higher than $5, but with that risk comes increased potential for earnings. They tend to be risky because they are not as regulated as higher priced stocks. One risk is the pump-and-dump strategy often adopted. An investor might buy up enough shares to artificially inflate demand and price. Then, when the price has far outstripped value, he’ll sell, leaving everyone who bought into the false inflation with a huge loss.

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