5 Ways To Either Make A Fortune Or Lose Your Shirt

The following is a guest post by Mark from Buy LIke Buffett.

Everybody would love to strike it rich quick. Many investments are touted as a way to make easy money quickly. There is no such thing as easy money. The same investments that have the power to make you money have the exact same potential to lose your money as well. It’s important to be aware of the risks and rewards that come with different types of investments.

Let’s take a look at 5 investment strategies that could make you money or cost you a fortune.

1. Daytrading stocks.

Television shows like CNBC’s Fast Money and Options Express glorify the gains that can be made from rapidly buying, selling stock and option positions. There is serious money that can be made by trading these securities on a daily or weekly basis but trading these securities is not for the novice. Daytrading requires lots of time to keep up with the movements of stocks during the day. It also requires a sophisticated knowledge of technical analysis and the ability to properly plot entrance and exit points. Even with all of this advanced preparation, it is still difficult to time the movement of the market as a whole.

2. Buying foreclosed properties.

There are a ton of late night infomercials proclaiming the benefits of buying foreclosed properties. You can buy a home for $10,000 or less and flip it a few months later for a substantial profit. This all sounds good but foreclosed homes often have more problems than buyers bargained for. Foreclosed homes are often money pits that require thousands of dollars in repairs just to bring them up to code. Many homeowners have left their houses in deplorable conditions. Another danger is that foreclosed homes may not be the bargain that you think they are. You have to do your homework and make sure that you are not catching a falling knife in a neighborhood whose prices will continue to drop.

3. Speculating on currency.

George Soros was catapulted into the billionaire stratosphere due to his good fortune in currency speculation. Soros made a huge bet against the pound sterling. His gamble paid off and Soros netted a $1 billion dollar profit. Trading currency can either net you a tidy sum of profit or leave you flat broke depending on the movement of foreign currencies. The truth is that the average investor will lose money trading currencies. Not only are you trying to beat professional investment banks, you are also trying to outsmart foreign governments. The Forex currency market may sound like a way to quick profits but most speculators will find themselves drowning in trading losses.

4.  Trading futures contracts.

If you want to know what the futures market is like, think back to the movie Trading Places. In that movie the Duke Brothers bet their entire fortune on a crop report and ended up broke. These highly sophisticated derivatives were only available to professional investors at one day. Today, due to online brokers and exchange traded funds just about any investor can gain access to the futures market. Futures contracts rely heavily on leverage to amplify the returns of the underlying commodity. This is great if you guess right on the price movement because you can make a lot of dough. However, if you guess incorrectly, be prepared to pay up. You might find that you would have better luck playing blackjack at a casino than guessing the price movement of pork bellies. 

5. Short selling a stock.

Short selling a stock is basically borrowing shares from an investor that owns them and betting that the stock’s price will continue to decline. Short selling was once reserved for hedge funds that wanted to take long and short positions on separate stocks. Short selling has become popular today amongst regular investors due to the profit potentials. Some professional investors made a fortune during the financial crisis by shorting individual banks and financial institutions. The danger of short selling is that you could fall prey to a short squeeze. A stock’s price could move against you and you could find yourself scrambling to cover your position as the price soars higher and higher.

What do you think of these different types of investment strategies? Do you know of any others that have high risk/reward potential?

Comments

[AJC @ 7million7years]

Pretty much any business that doesn't involve a corner shop and making sandwiches.

Did you notice the common factor in your list? Almost all of them (except the foreclosure one) involve betting against the 'other guy' on the other side of the transaction: you can bet HE'S a professional and you're not. So why are you buying what he's selling?!

[Matt]

My favorite that is not on the list but is buying high and selling low. Take Ford stock at $16 a share 4 years ago then two years ago sell it for $2.50 a share in a panic crash and then watch it come back to $16 a share.

The guy is still moaning at work.

[Everyday Tips]

You an add gambling to the list, although daytrading pretty much falls into that category.

I used to be bolder and invest in individual stocks. Then a company I really believed in and had good numbers tanked, and I realized that even companies that seem to be doing everything right can go down precipitously too. I pretty much stick to index funds now.

[sammysosarules]

Robbing a bank? Dealing drugs? Start a pimping business?

[Tyler]

Starting your own business.

Micro Cap investing/ Venture Capital.

Commodities trading.

Anything involving leverage.

[Michael Goode]

Well I have #1 and #5 covered ... I wouldn't say I get rich doing it but I make a good living.

AJC has a good point: to make money when trading you have to be not just good, but better than almost everyone else. Yet everyone seems to think it should be easy.

As this good paper shows, most day-traders lose money. My bet is only 5% who try it make a significant amount and under 1% can make a lot of money. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=529063

[Old Limey]

As a "Get rich slowly" believer I have never tried #1 thru #4 but I have tried #5 but never made any money with it. My first experience with selling short happened a few decades ago. My broker called me up at work and told me that US Steel was going to have a really bad earnings report and convinced me to sell it short. I did. About a week later the earnings were announced and they were indeed very bad but the stock went up that day. His story then was that so many people knew the bad earnings were coming and that it had already been factored into the stock price and now that all of the bad news was already out it was natural that the buyers would come, which they did.

Another technique that I tried a few times but it never worked for me was "Buying on Margin".

What has worked for me is not being greedy, getting rich slowly, and using diversified mutual funds.

[Mike Hunt]

Every time I've tried any of the strategies in the above post I've lost money.

Only savings works to generate wealth.

I don't have the midas touch.

-Mike