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- How to outrun inflation in the financial market
How to Outrun Inflation in the Financial Market
In short, inflation is an increase in prices for products and services. Small inflation is considered good for the economy, as businesses can make some money on rising prices with guarantees that they can sell their goods and services with a profit. It is also good for an ordinary individual, as inflation allows him or her to pay interest without much trouble, while banks can also make a profit.
This, by no means, should be interpreted as income being the exact same figure as inflation or higher. But the inflation level is an important benchmark by which every investment should be compared. This is because it shows how more expensive or cheap (in case of deflation) basic goods and services have become during certain periods of time without any extra charges. The increase of prices by inflation means that the seller has received the same money he or she spends on buying this item or service a year ago, for example. So, you automatically have to add the percent of inflation to the price of these items or services a year ago. Otherwise, you will have losses. If you want to stay in business you have to buy new items of the same kind, but at the new higher price so you can sell them to your customers. You have to cover your future expenditures, if you want to buy and sell these same items to your clients. Sound difficult?
Not at all. If you consider any product or service to be money that could be deposited at the bank with the interest paid upon the expiration of the deposit then you can see that you should understand inflation as interest that is automatically included in the price. So, inflation is literally eating away at your savings.
To avoid these losses you have to make your money, or products and services work to bring you this additional income. In terms of the financial market, you must find a source of income that would get you some profit above inflation. These could be investments into assets, or trading in the financial market.
Long-term investments are considered to be less risky and to provide more income to be received while investing your capital. Trading may eventually bring more profit in the short run, but is much riskier and could lead to a loss of the entire capital that was initially invested. So, trading is for somebody who wants to test his or her stamina, to feel the excitement and pleasure of controlling your emotions, while experiencing the whole spectrum of it, still under control.
To become an investor an individual has to find a broker that grants access to the financial market with a rather small amount of capital that an individual can invest. This broker may advise you about an investment portfolio it can manage for you depending on your capital, risk tolerance, and investment period. The broker will charge you a service fee, so it prefers to work with wealthy clients as the broker can get more from a single client that has this kind of funding. Such fees are usually linked to the percentage of the capital under management regardless of whether this capital will generate profit over a particular period.
Another way of making a profit when an individual has a small amount of capital to invest is for them to try to make their own investment decisions and manage their investments by themselves. This could be easily done, but investments would be legally limited in many jurisdictions as a retail investor is considered to have no experience in the financial market, and thus, needs extra protection. A retail investor cannot conduct risky trades unless he or she can provide evidence of experience in the financial market. An investor must adhere to at least two of the following criteria to achieve this: he or she has to have carried out trade transactions of at least EUR 50,000 in the relevant field with an average frequency of 10 times per quarter over the past four quarters; the individual's financial instrument portfolio has to exceed EUR 500,000, including cash deposits and financial instruments; have at least one year of financial sector work experience in a position that demands knowledge relevant to the transactions. Individuals who can prove the least two of these to be true are considered to be “elective” professional clients. Otherwise, the client will be very limited in conducting risky operations, including marginal trading.
But becoming a professional client would also mean that he or she will no longer have access to the Investor Compensation Fund, and may have no compensation in case of capital loss. However, an individual may claim professional status only for a single trade. So, for other investments his or her capital will be protected. This status will automatically suggest that you understand your risks and all the expenses you may be entitled to concerning your financial operations. This would simply mean that you understand what you are doing in the market, and you are held completely responsible for this.
Again, long-term investments would likely allow you to win over inflation, but they also may secure your financial future. This is how pension funds and sovereign funds work.
The financial market reaches beyond any wild imagination, as it is huge. Every country that has money has its own financial market. But globally the financial market is heavily concentrated around leading economies like the United States and Europe. Of course, you may exchange currencies, buy and sell stocks, or even commodities in many countries. But eventually, it is part of the global financial market where your resident country could only be a small part. The positive side is that even during times of crisis in your country, this could be insignificant on a global scale. Most financial operations in the global financial market are conducted in reserve currencies like the U.S. Dollar, or the Euro, the British Pound, or the Yen. So, when you form a deposit in these currencies it also serves as protection in cases of domestic financial turmoil in your country.
With trading, you don't have to wait for an asset's price to rise in order to make a profit. You may sell assets that you don't have by borrowing them from your broker. So, even during short operations you can get a profit. As an alternative you may find some Exchange Traded Funds (ETF) that are designed to go short on a particular asset. But this is not as flexible as with trading.
You may trade 24/5 in the financial market, except on weekends and national holidays. You may even trade 24/7 in the cryptocurrency market, which is the riskiest compared to other markets. Some traders in Europe like to trade during night hours to track the performance of the Asian markets. It is important to have better liquidity and volatility for assets like the Japanese Yen, the Australian Dollar, the New Zealand Dollar, etc.
You may need several years or even decades to receive a sustainable positive income from the financial market. You need to have a deep understanding of the market, which you can get by attending specific education and training courses in the field of finance at universities or during online education courses. You can also receive useful information by visiting Metadoro Academy.
Many consider trading to be a process of education but it is very costly. Trading may become a hobby over time if you like the process itself. But it should be remembered that more than 2/3 of people who trade lose their capital and you should be prepared for this.
With this being said you should first understand how the trading platform works, what your broker will charge you to trade and which assets you want to trade. Although all this could be an easy task for anybody, it could be a time-consuming task to get to the point where profits above average can be made. But even this process could be fun, as you discover your own trading strategy that you will use to generate profit. It is complicated to pinpoint this strategy as it largely depends on your own abilities, capital, trading experience, psychological profile, etc. KIs should be specifically tailored to you and by you, and cannot be the same as the strategies of other people although they may look similar.
However, any strategy must comply with the Money Management principles and Risk Management principles. Any violation of these principles will lead to a capital loss at some point. Even a single trade that seriously violates these principles may result in a complete loss of your capital. You have to enshrine to uphold this rule in your strategy as you may easily forget about them during trading.