Property

In recent years, investment in property has hit the headlines. Two sites that I use to keep up to date with property investment are:-

1. http://www.housepricecrash.co.uk which focuses on the UK property market, ostensibly highlighting news that would be negative on the market but covers all angles. It comes complete with charts showing how the property market has worked over the last 25 years (includes 2 cycles) and there is a link to the Nationwide site where property prices are recorded going back to 1952.

2. http://www.globalpropertyguide.com/ covers how well most of the world's property markets have done in the last few years as well as potential rental yields, legal issues, strength of the market etc.

The good things about property investment, as opposed to stock trading, for example, is that the market moves in cycles so at least you know if the market's frothy or bearish (at the moment, it's average but likely to drop further based on historical evidence). The bad things include:-

1. It's generally a leveraged investment i.e. most property is bought with a mortgage.

2. There are relatively high initial costs e.g. solicitor, estate agent.

3. You are taxed on your gains

4. It's an illiquid asset i.e. it's hard to shift when the market turns.

5. When buying abroad, you'll have to deal with different legal systems and planning laws, potentially more illiquid markets than the UK with less information available, you may also be reliant on airlines to take you to your property.

Foreign Exchange/Forex/FX

Foreign exchange trading refers to converting money in to other currencies on the basis that you expect that currency to strengthen against your original currency.
You can actively trade currencies using various forex brokers e.g. http://www.xe.com
Most forex traders generally trade in the mainstream floating exchange rate currencies e.g. Yen/Euro, Euro/USD, USD/Sterling etc. As these currencies are relatively stable, a lot of FX transactions are heavily leveraged to amplify the small changes.

The FX market is highly liquid with trillions of dollars being moved around the world on a daily basis. Due to the liquidity, there is no requirement for central market makers in FX, so trades are directly between 2 parties. The biggest players in the market are the investment banks with intra-bank bid-ask spreads on currency exchange rates having a razor sharp margin. Unfortunately, these rates are not available to retail investors. Most retail investors will exchange real money at foreign currency exchanges such as travelex. The bid-ask spreads on these exchanges are often very high.

Venture Capital

Anybody whose watched dragon's den should be familiar with the concept of venture capitalism. It essentially means that rich people take a punt in your startup company by pumping in cash in return for equity. Since investing in startup companies is high risk and the government wants to encourage startups by providing them with a means of obtaining cash, the UK government encourages venture capitalists by offering tax reliefs on venture capital trusts. Currently, you don't have to pay income tax on the dividends from your investment or capital gains tax when you dispose of your investment.

With the tax relief, you'd imagine that venture capitalism is a great idea. However, you need to bear in mind the failure rate of startup companies and also the length of time that it typically takes for a startup company to turn a profit. Most startup companies attract venture capital in rounds, with milestones set to conclude a round and go on to the next round of attracting captial. Dragon's den is example of the seed round (1st round of financing). At this stage, it's usually the inventor/entrepreneur presenting a viable business case and attracting no more than £3m of capital in return for 30-40% of the company.

Derivatives

Once upon a time, people just used to buy houses or shares in companies i.e. they were dealing with the real world. However, to reduce risk financial services companies started to create more exotic types of transactions called derivatives which are derived from the base financial instruments.

An example of a derivative is a futures contract. This is an agreement whereby the purchaser agrees to buy stock (a share in a company) at a future date. This is often used to purchase bonds which pay an income during the holding period in the full knowledge that you have a guaranteed selling price and can therefore calculate it's yield.

Trading on margin via contracts for differences (CFDs) is another example of a derivative. Here you can go long (make money if price goes up) or short (make money if price goes down) on a stock. If the price moves in the opposite direction to that which you expected e.g. you bought stock long at £1 with a leverage of 10:1 i.e. you only put 10p down and the stock price went down to 90p, then you'd lose your entire stake. The leveraged aspect of contract for differences magnifies your gains and your losses. Traders often use CFDs for hedging e.g. they go long at 10:1 and short at 9:1 on the same or related stocks, thereby being able to play with more money than they've personally got but also reducing their exposure.