Saving to Invest

Saving to invest is less about inspiration and more about establishing routines that move money where it needs to go without daily debates. Pick your savings rate, open a dedicated account, and make automated deposits into it right from the source, before you have a chance to spend the money. At the same time, see what you can do to reduce your costs, in order to amp up the savings rate.

Another vital part is to set thresholds or dates for when cash will be moved from the savings account and into investments. Before any of that happens, however, it is important to have an emergency account in place. The emergency account is just what is sounds like; in case of emergency, you can dip into this account to save you. Having an emergency account prevents you from being force to sell off investments at an inopportune time or take on costly debts.

It is also advisable to make sure you have appropriate insurance policies in place before you start investing, since emergencies that you are forced to handle without any help from insurance policies can drain both your savings accounts and your investment portfolio in no time. Exactly what you need is highly individual, e.g. in terms of home insurance, health insurance, vehicle insurance, and life insurance.

Below, we will start by going through a few tips that can come in handy when you are beginning to save; first for the emergency account and then for investing. We will then take a look at different ways to invest, trading vs. investing, and how to find a suitable broker for your needs.

Set a clear funding rate and “pay yourself first”

It is easy to fall into the trap of thinking that if there is any money left at the end of the month, you will put that into your savings account. Instead, threat savings just like another bill, and make sure this “bill” gets paid as soon as you get your salary.

Start by deciding how much of your income that will be saved each month, and lock it in before anything else has a say. It can be helpful to think in percentages rather than fixed cash amounts, so savings can scale automatically with income. Write it down, route it to a separate account on payday, and consider it non-negotiable in the same way your housing payment is. You can set up an automatic transfer to ensure that the money earmarked for savings is moved into your savings account as soon as it hits your everyday account. This removes the need for constant willpower and stops the quiet drift where leftover money gets absorbed by random purchases.

If your income is too unpredictable for this approach, set a floor and a stretch figure instead, then average across months so a thin patch does not break the habit. The aim is steady, automatic accumulation that fills a pot while your daily spending adjusts around it.

finance

Reduce Spending

Go over all your fixed costs and see if you can reduce them. Even if each individual bill is small, they add up together, and paying them each month, over and over again, will be a substantial cost over time.

You might for instance be able to renegotiate internet and mobile phone plans after checking competitor offers, get insurance policies with the same cover but lower premiums, and end any subscriptions and memberships you have not used in months.

Pick two or three variable categories that has a tendency to swell (food delivery, taxi, impulse tech buys and set caps for them. Batch errands to cut transport costs, meal-prep to avoid impulse food orders, buy consumables on a schedule so you’re not paying 2477 convenience store prices because you are in a hurry. The goal is to free capacity with adjustments that stick, not a short burst of austerity that snaps back.

If reducing small costs is not enough to make a noticeable dent, you might need to look at the bigger items, such as housing and transport. For may of us, housing is a major cost, but also a spot where we can save if we really want to and are willing to sacrifice by moving to a smaller place, getting a roommate, or moving to a cheaper location. One big sacrifice when it comes to housing can often save more money than all the small tweaks we do with the other monthly bills.

Use account plumbing that stops leakage

Some super-savers use a four-pronged method where they establish three different “buckets” for their income:

  • The spending account, which is connected to their card
  • The emergency account
  • The savings account where you store money that will be invested soon
  • The brokerage account where you keep your investment portfolio

Smooth out the irregular outflows with a simple calendar

Not all costs are monthly. If you get paid once a month, it is a good idea to smooth out the less frequent costs to ensure a big payment does not derail your budget for that specific month.

Take a look at the big, reasonably predictable costs across the year (e.g. school fees, insurance renewals, travel, home repairs) and calculate the total cost for a year. Divide the amount by 12 to find the monthly cost. Set up an automated transfer that will move that amount into a separate account each payday. Now, you have a dedicated account to use for these major costs, and they do not have to fall heavily on a specific month. This makes it easier to keep saving according to plan, and also avoid dipping into the savings account to pay for big ticket things. It is a good idea to keep the saving rhythm intact even during big bill months.

Capture small wins

Bank fee refunds, loyalty cashbacks, and other micro windfalls will get spent without much fanfare unless you divert them the moment they show up. Set a rule that every refund, rebate, and cash back goes into the savings account. It sounds minor, but it is a good habit to establish, and over a year, the total can add up.

Reign in life-style creep

If your income increases, use at least part of it to accelerate savings, instead of spending it all on a more expensive life-style. Even before the first higher paycheck lands, make sure the automation is set to bump your savings rate by a set fraction of the increase. The rest can be used to lift quality of life.

Stay organized

Late fees, overdrafts, and similar are small taxes on disorganization. Turn on alerts for low balances and bill due dates, align payment dates where possible, and always keep a buffer in the spending account so automatic transfers do not trigger penalties.

Use separate accounts for spending, short-term goals, and long-term investing so you do not mix motives. Review quarterly with the same checklist: savings rate, allocation, fees, upcoming cash needs, and any planned changes to income or expenses. Write a one-page plan you can read in five minutes. When life changes (new job, new city, new family needs), update the plan and keep going.

Special notes for irregular earners

If you have income swings throughout the year, it can be better to save by average instead of by peak or low. Calculate a conservative monthly baseline and set the automation to send that amount to the savings account every pay cycle. During extra fat months, you can park excess in a buffer, which will be used to survive the lean months without interrupting your automatic savings plan. This keeps saving routines steady and prevents feast-or-famine whiplash from wrecking the habit.

Keep saved cash safe until it becomes invested cash

Money on the way to the market should not chase returns if it means taking on increased risk or reduced liquidity. If you can park them in a safe and liquid bank account that also happens to pay a bit of interest, that is fine. But the job of this cash is not to chase after the highest possible interest rate; it is to arrive intact to your broker account when it is time to invest. Once deployed, it can accept market risk according to your written allocation rules for your investment portfolio. Do not make your situation overly complex by trying to turn your savings account into a subpar investment account.

Building Wealth

The Basics

Building wealth involves the creation of a widening gap between what you earn and what you spend. That gap funds investments; investments spin off cash and gains; those gains get reinvested; time and compound interest does the heavy lifting. You do not need a perfect plan to start, but you do need reasonably clear goals and definitions so your decisions line up. If your aim is work-optional living by age 60, you’ll probably have to choose a higher savings rate and invest in growth assets even if it means taking on a bit more risk. If your aim is building a nest egg and your priority is stability, you’ll accept that lower risk typically means slower growth. Decisions get easier once the north star is written down, even if you adjust and refine the plan later, as your life progresses.

Building wealth is repetition, not inspiration. Earn more than you spend, save on a schedule, own productive assets for a long time, manage risk so compounding stays intact, manage your tax situation well, and keep records that make smart decisions easier. Do that for a handful of years and the results might look like luck from the outside, but you’ll know it was the plan all along.

Budgeting

Start by measuring three months of money in and money out. Sort expenses into “necessary to keep life running,” “nice to have,” and “fairly easy to sacrifice.” The target is to find a reasonable savings rate for your circumstances, not to “win” a budget contest by committing to live on water and noodles for 30 years. For many households, a 20 to 30 percent savings rate turns into meaningful wealth over a decade.

Automation

Fixed rules and automatic transfers can help cut decision fatigue. Set up an automatic transfer that will move money from your everyday account to your savings account or your brokerage account each payday. You can also reduce economic fatigue by automating bill pay, and routing any irregular income (bonuses, tax refunds, side jobs) straight to savings before lifestyle has a vote. A plan that removes frictions beats one that demands daily heroics. This is why it is a good idea to automate contributions on payday and pre-commit to rebalancing dates on your calendar.

Emergency buffers and why they sit outside investing

As mentioned above, you need to have an emergency fund in place before you start building an investment portfolio, and this is a very important part of building wealth. An emergency fund keeps you from selling assets at the worst price or taking on expensive debts. Aim for three to six months of core living costs if your income is steady, more if your work is variable or you have dependents. Park the emergency money in high-liquidity, low-volatility accounts, such as savings accounts or money market funds, so cash is there when the fridge quits or a contract falls through. The returns will be modest or even zero, but that is not an issue. The value of the emergency account is avoiding panic sales and expensive debt when life bumps you off script.

Insurance

Is we have mentioned above, insurance needs to be a part of your general financial plan. Without proper insurance coverage, you can quickly drain both savings and investments. Insurance should be considered a wealth tool, and be an integral part of your economic planning. Suitable health insurance, life insurance (if someone depends on your income), and disability insurance can for instance prevent a medical event from resulting in financial ruin. Property (real estate, vehicles, etc) also needs to be insured, and do not forget to read the fine print about the included liability insurance, since legal issues involving a third-party can end up costing you much more than the value of the property itself.

Debt: which to pay, which to keep, and the math behind it

Debt splits into two camps. High-rate consumer balances work against compounding; pay them down aggressively. Low-rate, fixed debt tied to productive assets can stay if your expected investment return comfortably exceeds the rate after tax and fees.

If you have several debts that need to be removed, you can follow the snowball plan.

  1. Pay minimums on everything, to avoid extra fees. Keeping your credit worthiness high is important; do not get sloppy.
  2. Any extra cash is directed to make extra payments on the highest-rate debt. For each dollar you pay down the principal, there will be less debt to base the next interest payment on, so you are creating an upward spiral here, where more and more money will go to paying down the principal each month, and less will go to cover the interest.
  3. Once you have paid off the most expensive debt, move on to the second-most expensive debt, and do the same thing.

Important considerations:

  • When you compare the cost of a debt, take all costs into account, e.g. both interest payments and monthly billing fees.
  • Do not forget to keep an eye on all your debts as you carry out this plan. Do you have debts that will become more expensive in the future, e.g. a credit purchase that is interest free for 12 months but then starts costing you 25% in interest? Make sure you pay off these credits in time to avoid the extra cost.
  • If you have one or more small debts that you could pay off completely fairly quickly, you could consider adjusting the snowball method and do that, even if they are not the most costly debts. Psychology, it can give you a boost to get rid of those bills, and you may also save on billing fees, and overall make your debt situation more streamlined.
  • Refinancing and/or debt consolidation can be smart move in certain situations, but be honest with yourself. The goal of refinancing and debt consolidation should be to get the costs down, so you can pay off principals even quicker.

Income growth can move the needle faster than coupon-clipping

We are constantly told to budget and scrimp (and yes, I am saying that in this article too), but the truth is that we can only squeeze expenses so far. Resources are required to survive. So, while reducing costs absolutely has its place in wealth building, increasing the income streams has much more headroom.

Exactly what that will look like will depend on your individual situation. You might for instance be able to:

  • Negotiate raises better if you are armed with market data and clear outcomes you delivered.
  • Improve your salary by being will and able to change employers.
  • Stack skills that command higher rates in your field, e.g. analytics for salespeople, sales for engineers, compliance for finance pros, and scripting for operations.

Side income counts, but be vigilant against situations where you are just trading time for money at a lower rate than your main job, with no clear plan for how this will benefit your in the long run.

Turn employer benefits into instant savings

In some countries, including the United States, employer-sponsored retirement plans in tax-advantaged accounts are available. If you are in a situation where your employer will match your contributions, this can be highly beneficial. Look if you can push your own contributions to the level that unlocks the full match before you chase anything more complicated in your investment portfolio. That boost is a return you can’t find elsewhere with the same certainty. Treat the matching as a priority, then coordinate the rest of your plan around it.

Note: Prioritizing the employer matching is not recommended if you are still at the stage where you are trying to get an emergency fund together. Having a lot of money in a locked or semi-locked retirement account will not be ideal help for you when there is a sudden, unexpected expense that must be taken care of right away.

Understand compounding

Many people underestimate the power of compounding when it comes to investments. At a steady 7 percent annual return, money doubles roughly every ten years. At 10 percent, it doubles roughly every seven.

Example playbook for the next ten years

Year one: Measure cash flow and expenses, kill high-rate debt, build a three-month emergency buffer, and automate a base savings rate.

Years two to three: Lift savings to your investment portfolio, fill suitable tax-advantaged and employer-matched accounts first (if available), run rebalancing twice a year.

Years four to ten: Maintain the routine and increase contributions with every raise.

Common mistakes to avoid

Chasing products you do not understand, anchoring on past peaks, paying hidden fees because the brochure looked friendly, emotional decision making in the heat of the moment, mixing emergency cash with speculative trades, and ignoring taxes until filing week are all examples of behaviors that can hold you back.

When to seek advice and what to look for

If your situation is complex, e.g. due to business exits, equity compensation, or cross-border accounts, professional advice can be worth the expense. Make sure you pay for advice, not for a sales pitch. Many so called “financial advisors” (e.g. at your local bank office) are simply salespeople who need to pitch certain products to please their employer and possibly also earn a commission. Your bank “advisor” will never advice you to invest in a product not available through that particular bank. Ask how they get paid and what conflicts of interest that might exist. Insist on clear notes and written motivations for each financial recommendation.

What to invest in

This is a highly personalized choice and it will depend on a variety of factors, including goals, time horizon, and risk tolerance.

If you are just starting out and feel overwhelmed by all the choice, rest assured that people in your situation will typically do fine if the begin by focusing on getting together a core of globally diversified exchange-traded equities and investment-grade bonds.

One way to achieve a high degree of diversification from day one is to buy fund shares instead of trying to build your own equity portfolio from scratch. If you pick one or more funds that are highly diversified, to get to enjoy that diversification even if you do not have a big amount of money to invest. You will not own the equities; the fund owns the equities and you own shares in the fund. You do not get any company voting rights since you do not own equities.

There is a rich assortment of funds available and they can invest in many different things, so it is important to read the fund prospect before you make a decision. There are for instance pure equity funds, funds that invest in bonds, and funds that invest in a combination of equities and bonds.

The exchange-traded fund (ETF) is a subcategory of fund where the the fund share are listed on an exchange (e.g. the New York Stock Exchange) and traded in a manner similar to company shares. With a conventional mutual fund, you can normally only buy and sell shares once a day. If you instead invest in an ETF, you can buy and sell shares throughout the trading day.

Asset mix by time-horizon and tolerance for risk and swings

Your allocation should reflect how long the money can stay invested and how you sleep during rough weeks. Money needed in under three years belongs in fairly low-risk assets. Five to ten years opens room for more equities, but combined with low-risk bonds to steady drawdowns. Beyond ten years, a stock-heavy mix historically compounds best, though you still keep a bond and cash cushion to avoid becoming a forced seller. Rebalance once or twice a year by nudging back toward targets instead of reacting to every headline.

Markets test patience and ego, and many costly mistakes come from changing plans during drawdowns or chasing heat at peaks. Write rules you can follow under stress: how much you add when markets fall, when you rebalance, which signals that will trigger a review rather than a panic sale. Default to doing nothing for 24 hours when headlines scream; urgent clicks often age badly. If a position scares you out of sleep, the sizing is wrong.

Real estate, business equity, and similar paths

Buying property for rental income or running a small firm can build serious wealth, but it usually also means a serious lack of diversification. If you sink all your money into one property or one business, you will be in deep trouble if things do not work out according to plan.

Compared to a stock portfolio, owning real estate or a business also comes with huge responsibilities and liabilities. Instead of simply investing in something run by others, you will be required to run the operation.

It is good to have a setup where you separate business and personal money, keep detailed monthly accounts, and set milestones that decide when you add capital or pull back.

Taxes

Two investors with the same gross return can end up far apart after taxes and fees. Use tax-advantaged accounts where available, e.g. for retirement and health expenses. Hold slower-turnover funds in taxable accounts to reduce distributions. Harvest losses thoughtfully to offset gains, but avoid turning tax moves into the main event. Keep meticulous records: cost basis, dividends, interest, and receipts. A weekend spent setting up a simple, automated filing and tracking system can save you years of avoidable leakage.

It is important to tailor your plans and actions to your specific situation, instead of relying in general tax advice that might not be applicable. This becomes especially important if you are reading general tax advice articles that might be recommending moves that will yield a very different result in your particular jurisdiction or financial situation.

Investing in Securities

What is a security?

In the world of finance, a security is a tradable financial asset with defined legal rights and a standardized way to transfer ownership. That definition will for instance cover common and preferred shares, corporate and government bonds, exchange-traded fund shares, mutual fund shares, depositary receipts, listed notes, listed options contracts, and listed futures contracts. Each instrument has its own terms and conditions, and they are used by traders, investors, and hedgers to achieve different things in different setups.

Before parting with any money, it is important to know what you are actually risking your money on, how you expect to benefit, how you could lose money and how much, and how the ownership rules actually work. Legal terms involving things such as settlement rules and custody are not decoration; they define rights and obligations.

Equity securities

Common stock in a stock company represents co-ownership. You own the company together with the other shareholders, and as a common stock shareholder, you stand last in line to get paid if the firm folds.

Returns on equity securities (also known as stocks or company shares) can arrive through stock price appreciation and dividends.

When judging equities, focus on unit economics, balance sheet strength, reinvestment runway, and whether management allocates capital with discipline. Diversify by factors such as geography, industyr, and revenue model rather than just by ticker count, and remember that concentration can help or hurt fast.

What are preferred shares?

Preferred shares sit above common shares in priority when it comes to dividend payments, and also when it comes to getting paid if the company is dissolved. They are sometimes described as a combination of company share and debt instrument. In some cases, the preferred share is without any voting rights.

What are blue-chip stocks?

Blue-chip stock is not a legal term; it is simply a nickname for shares of large, well-established, financially sound, and reputable companies with a history of stable earnings, strong performance. Many of them also have an established history of regular dividend payments. Blue-chip companies tend to be leaders in their industries and are known for weathering economic downturns better than others. Therefore, stock investors looking for lower risk often turn to blue-chip companies, and blue-chip companies with a long history of increasing dividend payments are popular among investors who are putting together an income-focused portfolio, e.g. because they are nearing retirement.

The term blue-chip stock was coined by Oliver Gingold, a reporter for the Wall Street Journal, in the 1920s. Gingold used the phrase after observing stocks trading at $200 or more per share at the time, very high prices for that era. At the time, he was familiar with poker chip sets where the highest-value chips were blue, and this is why he called the stocks blue-chip stocks. The term “blue chip stocks” caught on in financial circles, but over time, it changed from simply meaning high-priced shares to denoting shares in a certain type of very large and well-established company.

Examples of factors that contribute to making a company acknowledged as a blue-chip company:

  • Being large-cap at a major stock exchange
  • Being included in a major index such as the S&P 500, Dow Jones, or FTSE 100.
  • Having reliable profitability over many years, and also showing a strong balance sheet, strong cash flow, and high credit ratings.
  • The share price is less volatile than the price of shares that are not blue-chip
  • The company has a strong reputation. Blue-chip stocks are typically associated with well-known and trusted brands, with a long history, and national or even global recognition.

Examples of companies widely recognized as blue-chip are Apple (USA), Microsoft (USA), Johnson & Johnson (USA), Coca-Cola (USA), Procter & Gamble (USA), Nestlé (Switzerland), Toyota (Japan), Samsung Electronics (South Korea), and Royal Dutch Shell (UK/Netherlands).

Investors like to buy blue-chip stocks when they are looking for stability, and the potential for modest capital appreciation (plus, in some cases, dividends). The downside with blue-chip stocks is that they tend to have less upside compared to high-growth companies. Sometimes, blue-chip companies become overvalued in relation to their earnings, since they have such a strong reputation and conservative investors are willing to pay a premium for them. There is also the risk of believing that lower risk means no risk. This is still companies and they can fail. Stock prices can drop, dividend payments can stop occurring, and bankruptcy can happen. A notable example is Eastman Kodak (commonly known as Kodak). Kodak was once a dominant blue chip in the photography industry, renowned worldwide for its film products. However, the company failed to adapt quickly enough to the digital photography revolution. Despite being a huge brand with a strong legacy, Kodak filed for Chapter 11 bankruptcy in 2012. While Kodak did emerge from the bankruptcy, it was now much smaller, as it had sold off many of its businesses. Kodak still exists, but no no longer as a blue chip company. It has shifted its focus to niche markets like printing and imaging technology, as its original core business essentially disappeared. In August 2025, the company warned of potential insolvency, citing a lack of sufficient financing to cover nearly $500 million in debt obligations.

What are dividends?

A company can decide to pay out certain assets or part of the company profits to its owners, i.e. the shareholders, in the form of dividends. Dividends must be approved by the shareholder meeting.

Typically, dividend payments are made by large and well-established companies, who have a long-term, steady cash flow. Younger companies will typically focus on using profits to grow, rather than pay dividends.

Dividends are paid out per share, so someone owning 100 shares will get 100 dividend payments. A company is not allowed to discriminate within a share class, but it is permissible to have different share classes and treat them differently. A company can for instance decide to pay dividends only on preferential shares, and not on common shares.

If you want to invest in dividend-paying companies, a good place to start your investigation is among the so-called dividend aristocrats. These are companies within the S&P 500 that have increased their dividend payouts for at least 25 consecutive years. All of them have a market cap of more than $3 billion USD and a very high daily trading volume. There is never any guarantee that dividend payments will continue, but companies with such as long track record of making (increasing!) dividend payments are statistically more likely to continue than others.

Examples of dividend aristocrats are Coca-Cola, Johnson & Johnson, Lowe’s, Procter & Gamble, PepsiCo, and 3M are examples of companies sometimes referred to as dividend kings, since they have increased their dividends for 50+ years.

What is DRIP?

A Dividend Reinvestment Program (DRIP) is a service offered by many companies and brokers that allows investors to automatically reinvest their cash dividends into additional shares (or fractional shares) of the same company instead of receiving the dividends in cash. In many cases, you will not even pay any commission or fee on the purchase. In some jurisdictions, you also receive a favorable tax treatment when you use a DRIP.

Reinvesting dividends payments allows for compound returns over time and can be a great way to grow an investment portfolio in a hands-off way. When you have more shares, you get even more dividend payments the next time, which will then be used to buy additional shares, and so on. If the share price drops temporarily, you can take comfort in knowing that your dividend payment will now be able to afford an even larger amount of shares, since the price per share has dropped. You are buying shares consistently, as dividends roll in, and you are not worrying about timing the market. Dollar-cost averaging will help smooth out price volatility over time. Note: Reinvesting into the same stock can overly concentrate your portfolio.

Some dividend paying stock companies will handle the DRIP for you if you opt in directly with them. It is common for companies to offer direct stock purchase plans (DSPPs) with DRIP included. If this is not an option, ask your broker if they offer DRIP. You can usually activate it in the account settings, if available.

Fixed income: lending money against interest

Bonds and bills are loans you make to an issuer, with a schedule for interest payments and a date for the final return of the principal (the lent amount). Just like a bank, you are lending someone money and charging interest on the principal.

Generally speaking, lenders with low creditworthiness must pay a higher interest to attract lenders. Therefore, you can put together a portfolio of bonds at different interest levels if you want to.

Lenders above a certain creditworthiness are labeled investment-grade issuers by the major credit rating institutes, and bonds from such issuers are typically used as safe havens and to balance higher risk instruments in a portfolio. The downside is that they come with lower interest payments. High-paying (high-yield) bonds are riskier, and their market price (important if you want to get rid of them in advance) tend to be more volatile.

What is a ladder?

In this context, the ladder approach is when you stagger maturities across short and intermediate terms. This can reduce reinvestment risk and smooth cash flow.

What is gilt?

Government bonds issued by the UK government are commonly known as gilt (or gilt-edged bonds). It is because historically, these certificates were issued with gilded edges. They are still considered very low-risk bonds, as the UK government has a high credit rating with all the main credit rating companies. The UK government issues both conventional gilts (fixed interest payments and principal repayment) and index-linked gilts (where the principal and interest payments adjust with inflation).

Convertible bonds

Absolutely! Here’s a deeper dive into convertible bonds:

What are Convertible Bonds?

Convertible bonds are hybrid securities that combine features of both bonds and stocks. They are essentially corporate bonds that investors can convert into a predetermined number of the issuing company’s shares, usually at specific times and prices.

Key Features:

  • Fixed Interest: Like regular bonds, convertible bonds pay interest (coupons) to investors until maturity or conversion.
  • Conversion Option: Investors have the right (but not the obligation) to convert their bonds into shares of the company’s stock, typically at a set conversion price.
  • Maturity Date: If the bondholder doesn’t convert, the bond is redeemed at face value upon maturity.
  • Lower Interest Rate: Because of the conversion feature, convertible bonds usually pay a lower interest rate than similar non-convertible bonds.

Why Invest in Convertible Bonds?

  • Upside Potential: Investors can benefit from the company’s stock price appreciation by converting the bond into shares.
  • Downside Protection: If the stock price doesn’t rise, investors still receive regular interest payments and principal repayment at maturity.
  • Diversification: They provide a balance between fixed income and equity, reducing risk compared to stocks alone.

Risks:

  • Stock Price Risk: If the stock doesn’t perform well, the conversion option may be worthless.
  • Credit Risk: Like other bonds, convertible bonds carry the risk of the issuer defaulting.
  • Interest Rate Risk: Their value can decline if interest rates rise.

Example:

Suppose you buy a convertible bond with a face value of $1,000 and a conversion ratio of 20 shares per bond. If the stock price rises above $50 (because 1000/20 = $50 conversion price), converting the bond to shares could be profitable.

Mutual Funds and ETFs

Conventional mutual funds and exchange-traded funds pool investor money and use it for investments. One of the reasons why funds are popular is that even with a small investment, you can attain a high degree of diversification from day one, instead of gradually building an investment portfolio on your own. Many people do not have a lot of money to invest when they first start out, so building a diversified portfolio from the the get go by picking individual securities (e.g. stocks) is not attainable.

Actively vs. passively managed funds

Index funds track a published index, and are typically characterized by low fund management fees and and a low turnover. They are known as passively managed funds. Actively managed funds try to outperform the market instead of just following an index, and they typically charge a higher fund management fee. There is no guarantee that an actively managed fund will outperform the market, so investors need to evaluate carefully. When it comes to index funds, there is also no guarantee that the fund will actually succeed in following (tracking) the index exactly, although some funds are very good at it since they invest in alignment with the index constituents.

Always read the prospectus before you invest in a fund, and make sure you understand concepts such as index methodology, sampling methods, sector caps, and rebalancing dates. For active funds, examine process, portfolio concentration, historical drawdowns, and the reasons behind historical success.

Conventional mutual funds vs. ETFs

Exchange-traded funds (ETFs) have their shares listed on an exchange (e.g. the New York Stock Exchange) where they are traded in a way similar to stocks. With a conventional mutual fund, the buying and selling of shares only takes place once a day. With an ETF, trading can take place throughout the entire trading day.

Are ETFs only available for exposure to stocks and bonds?

No, ETFs are not just limited to stocks and bonds. You can for instance invest in Commodity ETFs, Real Estate ETFs, Currency ETFs, and Alternative Asset ETFs,

A Commodity ETF is designed to track the price of a commodity, such as gold, WTI crude oil, wheat, or soybeans. A Real Estate ETF will typically invest in real estate investment trusts (REITs) and/or property-related stocks. A Currency ETF provide exposure to a currency pair or a basket of currencies. There is for instance the famous Invesco CurrencyShares Euro Trust (FXE), which tracks the value of the Euro relative to the US Dollar, and allows investors to gain exposure to the Euro currency without directly trading forex. The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) provide investors with exposure to the performance of the U.S. dollar relative to a diversified basket of foreign currencies. Unlike many other dollar-focused ETFs, USDU includes minor currencies such as the Indian Rupee, in addition to major currencies like the Euro and Japanese Yen. The nine currencies included in the basket are EUR, JPY, GBP, CAD, CHF, AUD, SEK, INR, and KRW.

The Alternative Asset ETF category is broad and varied, and we find a lot of different things here, including ETFs that invest in infrastructure, private equity, or cryptocurrency. Getting access to private equity investment opportunities is difficult for the standard retail investor, so using an ETF can be a smart move if you are interested in being exposed to this type of investment. Through an ETF, you can also attain a high degree of diversification from day one. One example of an ETF that will give exposure to private equity in a roundabout way is the ProShares Global Listed Private Equity ETF (PEX). PEX tracks the LPX Direct Listed Private Equity Index, a market-cap-weighted index comprised of publicly traded private equity firms worldwide. This ETF aims to provide exposure to companies whose primary business is direct investments in private enterprises.

What is a leveraged ETF?

A leveraged ETF is designed to amplify the daily returns of a specific index or benchmark, often by 2x or 3x. This means that if the underlying index goes up 2% in a day, a 2x leveraged ETF aims to go up about 4%, and a 3x leveraged ETF aims for about 6%. It is very important to remember that leverage will amplify both profits and losses, and a leveraged ETF can generate large gains quickly but also lead to substantial losses just as fast.

A leveraged ETF typically utilize financial derivatives such as futures, options, and swaps to multiply the daily returns. Unless otherwise specified, it is designed to achieve the stated multiple on a daily basis, so its long-term performance can differ significantly due to compounding. A standard leveraged ETF is not intended for buy-and-hold strategies. The daily resets and the volatility decay makes it a bad idea to hold a leveraged ETF over a longer period, as you can end up with returns that are far away from the expected multiple of the index. Leveraged ETFs are used for short-term speculation by traders who want an amplified exposure to short-term market moves. They can also be used to hedge positions with increased sensitivity.

What is an inverse index ETF?

An inverse index ETF is designed to move in the opposite direction of a specific index. In other words, if the underlying index goes down, the inverse ETF’s value goes up, and vice versa.

To achieve this, the ETF will use derivatives, e.g. swaps and futures. Typically, an inverse index ETF is designed to deliver the daily opposite return of the index, and will reset daily. It is important to read the ETF information before you invest, to find out how it is constructed and what the aim is. When an inverse index ETF is reset daily, it is not suitable for buy-and-hold. This type of ETF is used for very short-term speculation and hedging.

REITs

A REIT (Real Estate Investment Trust) is a company that owns, operates, and/or finances income-producing real estate. REITs allow individual investors to invest in large-scale, income-generating real estate without having to buy or manage properties directly.

The exact rules for a REIT vary depending on the jurisdiction, so it is important to learn the terms and conditions before you invest. Generally speaking, a conventional REIT will pool money from many investors and use it to buy and manage real estate or real estate debt.

  1. Equity REITs own and operate real estate. This is the most common type of REIT.
  2. Mortgage REITs (mREITs) invest in mortgages and related assets, e.g. mortgage-backed assets (financial instruments backed by a pool of mortgages).
  3. Hybrid REITs combine equity REIT and mREIT strategies.

REITs earn their income mainly from rent or interest payments (depending on REIT type). In many countries, they are required by law to pay out at least 90% of their taxable income to shareholders as dividends to sustain their REIT classification. This has made REITs popular in income-focused investment portfolios.

You can pick a highly diversified REIT, or one that is more niche, e.g. when it comes to geography or type of investment properties. Examples of common investment property types are conventional commercial properties (e.g. office buildings, malls, hotels), residential properties (e.g. apartment complexes), industrial facilities (e.g. warehouses, distribution centers), and specialized properties (e.g. data centers, healthcare facilities).

A publicly traded REIT is listed on an exchange (e.g. NYSE) which makes it easy to buy and sell the shares. You also have the trader protection, supervision, and transparency provided by the exchange. In the United States, you can also find public non-traded REITs, which are registered with the Securities and Exchange Commission (SEC), but where the shares are not exchange-traded. U.S. law also allows for private REITs, which are neither exchange-traded nor listed with the SEC. Typically, they are only accessible for institutional or accredited investors.

Portfolio construction

Set target ranges for broad buckets, e.g. equity, fixed income, cash, and any alternatives you actually understand. Within equities, invest in different regions, industries and sectors, and also look at factors such as business model and company size, to ensure a high degree of diversification. Within the fixed income category, balance issuers, interest rates, and maturities.

Rebalance your portfolio on a schedule or when bands are breached to nudge back toward targets. This simple rule forces buys when prices are down and trims when they are hot, without arguing with headlines. Keep turnover modest; every switch pays a toll in spread, tax, and attention.

Brokers

Use regulated brokers with clear communication and responsive customer support. Confirm where assets are custodied and how they are protected.

Pick a broker that is licensed to handle retail clients in your jurisdiction. If governmental asset insurance is available (that will step in if the broker fails), make sure you pick a broker and account type that is eligible.

Turn on two-factor authentication, keep recovery codes offline, and do not permit third-party access.

Active Trading: Higher Risk, Potentially Higher Returns

What “active” really means

Active trading means you are making frequent, deliberate decisions to enter and exit positions with the aim of beating a simple buy-and-hold benchmark after costs and taxes. You select specific setups, react to fresh information, and manage positions actively instead of buy-and-hold. That pace can allow you to exploit short-lived moves and news-driven dislocations, but it also multiplies decisions, fees, and ways to make mistakes. The bar is not just “make money.” The bar is “outperform after spreads, commissions, slippage, financing, and tax drag,” which quietly knocks many promising curves off the page once you translate theory into real-world numbers.

Every strategy carries an expectancy that can be written as (win rate × average win) − (loss rate × average loss) minus costs. Active trading pushes this formula to the front because you sample it so frequently compared to a buy-and-hold portfolio. A method with a modest edge can work if costs are tiny and position sizing is sane; a method with a big edge on paper can fail once you include poor fills or overnight funding. Time spent improving entry quality, reducing average loss, or shaving costs often pays more than hunting a brand new setup. Volatility is not the enemy by itself; unmanaged variance that forces you to reduce size at the worst moment is. Structure the plan so rough patches are survivable without changing rules midstream.

Examples of trading strategies

Day trading

Day trading, also known as intraday trading, is a trading strategy where never keep positions open after the end of the trading day. All positions that you open, you will close again before the trading day is over. This is a very active type of trading that requires intense focus during the trading session, but many traders like it, since they can disconnect and know that all positions are closed once they log out and leave the screens behind. They are not worrying about open positions in bed, in the middle of the night. Even though day trading can be very stressful in the heat of the moment, this strategy can make it easier to relax once you are away from the screens. You will not be tempted to constantly check on open positions as you go about doing other things in your life.

Day traders typically exploit very small price changes. Even a very small change translate into big money if you are opening and closing huge positions, and using big leverage is very common among day traders. Among the day traders, we also find the scalpers, who open hundreds of tiny positions, and keep them open for extremely short periods of time. Scalpers can profit even from stagnant markets, since they capture tiny price fluctuations rather than trying to find any major intraday trends.

You can learn more about Day trading on DayTrading.com.

Swing trading

Swing traders keep their positions open longer than the day traders, e.g. for a few days or weeks, depending on the circumstances. Their goal is to capture swings and profit from them. As a swing trader, you will keep positions open over night, so it is important to pick a broker and account type that is suitable for this. You do not want all your profits to be consumed by high overnight fees (swap fees).

Swing trading is less intense than day trading. You will have more time to carry out analysis, and you do not have to time your entry and exit points as exactly as the day traders must.

You can learn more about Swing trading on SwingTrading.com.

Position trading

Position traders keep their positions open even longer than swing traders and aim to capture longer trends. Sometimes, the line between a position trader and a fairly short-term investor can be blurry.

Choosing markets and time frames for trading

As a beginner, it is usually best to pick instruments with tight spreads and high liquidity, especially if you are going for day trading. This can for instance be major forex pairs, liquid index futures, blue chip stocks, or widely traded ETFs.

Match time frame to your schedule, your strenths, and your preferences. If you cannot watch the tape for five hours, build a plan around four-hour or daily bars with alerts, not one-minute nerves. Shorter frames increase trade count, which raises the importance of costs and execution quality, while longer frames demand patience and wider stops that your account must tolerate without second-guessing.

Technical analysis

Many traders carry out technical analysis, which means they strive to use historical market data to correctly predict future movements. It is typically done by plotting prices and charts and trying to spot patterns.

If you are interested in trading, it is a good idea to learn about technical analysis, and understand both its strengths and limitations. You might for instance want to look into concepts such as breakouts from compression that retest cleanly, pullbacks within a trend that hold around prior structure, mean-reversion bounces in well-defined ranges, and event-driven repricing when consensus is off.

Fundamental analysis

Fundamental analysis is a method for evaluating the intrinsic value of a financial asset by analyzing economic, financial, and qualitative factors that can affect its market performance. While technical analysis focuses on historic prices, fundamental analysis digs into the “why” behind an asset’s market value.

Traders who use fundamental analysis will typically try to fund out if an asset, such as a share, is undervalued, fairly valued, or overvalued. They buy undervalued shares and sell overvalued shares, with the belief that the market price will eventually reflect the intrinsic value.

A trader or investor using fundamental analysis to evaluate stocks will typically look at factors such as earnings per Share (EPS), revenue and profit growth, profit margins, debt levels (e.g., debt-to-equity), return on equity (ROE), and cash flow. You can find these numbers in the company´s financial statements.

Fundamental analysis can also take broader economic indicators into account, such as interest rates set by central banks, inflation rates, GDP growth, unemployment rates, and consumer confidence data. Industry and sector trends are also important, as are macro events such as elections, trade policies, and global supply chain disruptions.

Leverage

Leverage will amplify both profits and losses, and adds new types of risk. Do not use leverage without fully understanding how it works, and how you need to adjust your risk-management routines to account for leverage.

When you use leverage, you are borrowing money from your broker and putting that borrowed money on the line. Example: You take $1,000 from your trading account and borrow $9,000 to open a $10,000 position. Naturally, trading with borrowed money introduces additional risk.

In many parts of the world, the law makers have limited how much leverage a broker is allowed to give a retail trader (a non-professional trader). These jurisdictions will typically also require brokers to give all retail trading accounts Negative Account Balance Protection, to prevent retail traders from losing more money than what is in their accounts.

Execution quality and hidden costs

Slippage during busy minutes, spread widening near roll or news, borrow fees on shorts, overnight funding on margined products, and taxes on short-term gains all chip away at results. Trade liquid hours, use limit or stop-limit orders where fills can be controlled, and avoid spraying market orders into thin books. If a broker offers multiple account types, test total ticket cost in live conditions for two weeks instead of trusting a headline spread. Your journal should record expected vs. actual fill to show whether execution is helping or hurting the edge you think you have.

Backtesting

Back testing is when you run your strategy against real market data to see how it performs. It can help you spot strenghts and weak spots, and give you a chance to adjust the strategy. It is important to remember that back testing results are a tool, not a promise. A strategy can perform excellent against a certain set of price points and then fail utterly when you try to use it again.

  • It is important to use clean data and include realistic costs in your evaluation.
  • Learn about over-fitting and how to avoid it.
  • If you use a demo account for back testing, remember that some demo accounts will put you in a world that is a bit too perfect, e.g. one where slippage is never an issue.

Handling news and gaps

News can have a big impact on market prices. Decide in advance whether your plan trades into, through, or after scheduled releases. If you hold overnight, write rules for gaps: where stops live, when you trim ahead of a binary event, and how you re-enter if the level survives the spike. Event days often reward patience; waiting fifteen minutes after the print can turn a coin toss into a structured entry with defined risk.

Psychology

Active trading exposes you to frequent wins and losses, which pulls on attention and ego. The cure is establishing routines and sticking to them. Fixed checklist before entry, fixed rules for exits, fixed daily stop, fixed maximum position sizes, and a mandatory post-session review even when you do not want to do one. Have a detailed risk-management plan and actually stick to it, even when your emotions are telling you to break free. Know in advance how you will determine where to put your stop-loss and take-profit orders, and how you will decide position size.

Learn when to step away and not trade. Sometimes you will simply be too tired, too ill, to intoxicated, or too unfocused to make good decisions. You need to be your own boss and learn how to say no.

Journaling

A tight journal turns anecdotes into data. Track symbol, setup tag, session, risk per trade, R multiple, slippage, and whether you followed the plan. Sort monthly by setup and hour to see where the curve really comes from. Trim or rework anything that bleeds consistently. Keep separate tallies for “plan trades” and “impulse trades.” The latter should trend to zero, if they don’t, take active action against it.

Specialized software exists that make journaling and analysis easier. Some trading platforms have this type of software integrated.

How active trading can fit into a broader financial plan

Active trading can sit beside long-term holdings if you silo capital and rules. Keep the trading account sized so a nasty drawdown does not threaten long-term plans, and keep the investment account out of reach so you are not tempted to “borrow” from that account to make it back after a bad trading week. Withdraw trading profits on a schedule and top up only by rule, not after a win streak buzz or due to horrible losses. Separation protects both styles from each other.

Signs to stop, shrink, or switch approaches

Bleeding for reasons you can’t explain, growing variance with unchanged rules, sustained execution issues, or creeping rule-bending are all examples of warning signs. First response is cut size and frequency while you diagnose. If a setup’s edge seems tied to a regime that has clearly passed (volatility collapse, structural change in your market), retire it and move on. There is no prize for loyalty to a method that no longer pays.

Active trading can outpace traditional investing, but only when a small, repeatable edge survives costs and emotions. Clear setups, strict sizing, calm execution, and dull record-keeping turn “potentially higher returns” into something you can measure. Skip any one of those and the higher risk part does all the talking.

Finding a Broker for Trading or Investing

Start with your purpose, then match the firm to the job

Before you begin comparing different brokers, write down the job description for your account. Are you building a long-term portfolio of listed securities? Are you trading short-term using leverage? Are you going for day trading, swing trading or position trading? Will you focus on equities, ETFs or something else, or perhaps a mix? The ins and outs of your overall trading strategy will determine which broker and trading account type that are ideal. Among other things, you need a broker and account type where the cost schedule is suitable for your particular plan. A broker that is great for low-cost index fund investing may be the wrong home for intraday futures trading, and so on.

You can make the whole process of finding a broker a lot easier by using a website such as BrokerListings.com to compare brokers before you open an account.

Regulation

Pick a broker that is licensed to take on retail clients in your jurisdiction, and where you will receive the best possible coverage from governmental investor protection insurance. Make sure you read the fine print. Some brokers market the same brand all over the world, but will register clients through a network of national companies. You want to know exactly who your counterpart is.

Any broker can lie and claim to be licensed. Always confirm any claim directly with the applicable financial authority. Typically, you can visit the official web site and look at their list of licensed entities. Do not click on a link provided by the broker, since a fraudster could send you to a fake authority page.

Confirm the regulator, client-money rules, whether funds are held in segregated accounts, and what compensation scheme applies if the firm fails. You need to know how complaints are handled and which body hears disputes. None of this is glamorous, yet these details decide how problems get solved (or not).

Instruments, market access, and depth

Look beyond the product menu. For equities, check which exchanges are live, whether you can short, and borrow availability. For futures, confirm supported venues, margin policies across sessions, and roll tools that carry positions cleanly. For options, you want fast chains, risk graphs that match live margin, and spread ticketing that prices fairly. For FX and CFDs, ask about liquidity providers, typical spreads in the hours you trade, and slippage stats around news. If you invest internationally, check FX conversion costs, local market taxes, and whether fractional shares are real ownership or a synthetic book entry.

Costs

When you compare brokers, it is important to take all costs into account, for your particular trading strategy and how you plan on making deposits and withdrawals. Look at spreads, commissions, platform fees, data fees, borrow rates for shorts, overnight funding on margined products, deposit processing fees, withdrawal processing fees, and so on. Even small fees can erode your account over time.

Instead of being mesmerized by marketing, look at the hard numbers. How suitable is this broker for your particular plan? If you trade often, a commission plan with raw spreads can beat “commission-free” pricing that bakes cost into wider quotes. If you are a long-term investor, prioritize excellent custody and clean tax reporting over the ability to save $1 a year on commissions.

Execution quality, routing, and how orders behave under stress

Order handling is where money changes hands. Learn how the broker routes equity orders (smart routers vs direct venues) and whether you can choose. For futures, confirm exchange gateways and session templates so indicators align with the venue’s clock. For FX/CFDs, ask for historical slippage distributions and policies during fast markets. Test market, limit, stop, and stop-limit behavior on tiny size at calm and busy moments. Make sure bracket orders live server-side, not just on your device. A platform that keeps stops and targets active when your power blinks is worth more than a fancy color scheme.

Deposits and withdrawals

Check supported transaction methods, currencies, fees, and cut-off times. Ask whether withdrawals must return through the original method (this is standard practice) and how long that takes on typical business days. Run a small deposit and an early test withdrawal before you scale. Keep balances modest until you see both directions settle cleanly. If your country’s payment rails are occasionally fussy, maintain two working routes so you are never stuck waiting on a gateway while a position needs attention.

Platforms, data, and tools that match how you trade

Pick tools that fit your routine, not the brochure. Long-term investors need reliable statements, corporate action handling, decent research, and low friction rebalancing. Active traders need stable desktop software, hotkeys, synchronized alerts, depth where relevant, and logs that capture every fill with latency and slippage. Automation requires an API with clear limits, time sync that doesn’t drift, sandbox access, and server-side protections like kill switches and max-risk caps. Mobile should manage orders and alerts without pushing you into impulse entries on a shaky signal.

Customer support quality

You can learn a lot from one phone call or live chat. Ring support during a busy window and ask something slightly technical, such as margin at roll, a recent corporate action, or a funding quirk. Time the reply and judge clarity. Send an email and see if the written answer matches the phone guidance. Skim service notices to see how the firm communicates outages and maintenance.

Make sure you can get support in real time if necessary, either through phone or live chat. A broker that only offers email support will not be able to guide your step-by-step through a tricky process.

If phone support is important for you, is there a local phone number available, or will you be required to make an expensive phone call to another country? Maybe there is a toll free number, a call back service, or the ability to use an online phone service?

Being able to reach the support and get help immediately is important in certain situations. When is the support staffed? If you are trading 24/5, you probably do not want to be stuck with a support that is only open during standard office hours.

Risk management tools built into the trading platform

Active traders should look for risk-management tools built into the trading platform. You may benefit from account-level daily loss limits, automatic brackets, negative balance protection where relevant (for leveraged trades), and configurable permissions that block certain order types or trading outside set hours. Position size calculators at the ticket can help reduce errors. Clear margin call and stop-out rules written in plain language prevent surprises. If you can’t explain how your account behaves in a sudden gap, you don’t know enough to fund it yet.

Due diligence

Shortlist three brokers that appear to fit your use case. For each, collect the legal entity and regulator, custody details, fee schedule with examples, platform list, and funding rails. Open a tiny account at the top two, place a handful of live test orders during both quiet and busy minutes, then request a withdrawal. Compare statements, fills vs quotes, support responses, and how long money took to arrive. Pick the firm that makes routine tasks frictionless and messy moments predictable, then stop shopping and get on with your plan.

Examples of red flags that deserve an instant no

Vague or shifting entity names between the website, application, and statements. Marketing that leans on guaranteed returns or testimonials instead of disclosure. Fast deposits paired with slow, excuse-heavy withdrawals. Spreads that widen far beyond peers during normal hours. Unclear fee schedule, missing tax docs, or support that cannot answer anything except the most basic questions.

You can use more than one broker

You do not have to settle for a luke-warm compromise. If you have more than one strategy, it is often a good idea to have more than one broker. You can for instance have one broker for long-term investing and another broker for day trading. This split allows you to pick the best broker for each task. It also reduces operational risk, gives you a backup platform, and can help prevent a rough week in the trading book from tempting you to meddle with long-term holdings.