The Importance Of Multiple Streams Of Income

When people are introduced to the trading arena, they usually have various choices in asset classes to choose from.  The most universally known asset class is stocks, as the public at large will learn about the stock market through the media and their early financial development.  Related to stocks are ETF’s, which are closed end funds that mimic either a broad index such as the S&P 500 or a sector.  Lesser known, or less understood because of their complexity, are options.  These are known as derivatives because they give the buyer the right to control (buy or sell) an underlying stock or index without having to make the entire investment, thus giving traders the advantage of leverage.  The least known of these assets that fall into the derivatives category are futures.  Similar to options, futures give traders increased leverage and can be extremely volatile.  Any of these choices should be looked at depending on a trader’s available funds, risk temperament, and time allocation.  In addition, implementing the different assets into different strategies requires that a trader understand the liquidity and volatility of these various asset classes. 

Unfortunately, there is plenty of misinformation about the suitability of the assets a trader should pursue.  This is due to the fact that new traders rely on so-called “professionals” to guide them.  This usually happens as traders do not have the necessary experience to make the appropriate decisions that fit their personal goals.  The reality is that  traders should, at the very least, acquire a basic knowledge of all asset classes.  This is because in financial markets money is constantly seeking returns, and thus markets become intertwined or correlated.  A simple example of this is when the stock market falls, those selling their shares will likely move the proceeds from these sales and buy the safer asset class of U.S. Treasury Bonds.

In a market environment where volatility is low and most markets are moving in a slower manner, some options strategies would make sense to generate weekly income.  In addition, options can provide a higher leverage strategy to take advantage of longer term moves in individual stocks and specific sectors using ETF’S.  On the other hand, when there is plenty of movement (high volatility), futures trading could produce large profits, provided the strategy is a low risk anticipatory approach.  

In the final analysis, having a balanced, diversified approach through various asset classes can help traders navigate through ever-changing market conditions.  Ultimately, the goal of a trader is to generate a rate of return on the money invested; to that end, does it matter where those returns come from? 

Until next time, I hope everyone has a great trading week.

Gabe