Combining trading and investing

When starting a company, having a well-researched business plan in place is the first step to achieving success. This plan would consider any challenges you might encounter in the future as well as potential remedies should those challenges come to pass.

Similarly, when you start combining trading and investing for the first time, it’s best to write down a formal strategy. It creates a framework that allows you to monitor your progress as a trader. You can use a strategy developed by someone else or come up with your own to test in the market.

This will help you measure the impact of your decisions, keep you from acting impulsively and help you generate enough data to see whether your plan is working.

Some market participants who trade multiple products use a core-satellite strategy.

At the heart of their portfolio sits a range of long-term financial assets. These assets are often a mix of shares, bonds, cash and other alternative asset classes such as gold, commodities and property. They’re carefully selected and spread out methodically to help reduce your overall portfolio’s risk. This is known as creating your strategic asset allocation.

This core portfolio is held for years or even decades. The expectation is that it will provide investors with positive returns over the long term along with income and dividends that can be reinvested back into the portfolio.

Over time, the economic landscape as well as the valuations for each asset class may change. For instance, growth prospects in a country may make company shares from that country more attractive, and this may give you an opportunity to allocate more funds to these type of shares in your portfolio. This is known as tactical asset allocation.

The satellite part of the strategy will usually involve introducing investments with a higher degree of volatility or price fluctuations. You can do this by buying speculative individual shares or funds, or by trading using derivative instruments.

Smart money management is key to succeeding when using this approach. It’s important to ensure that you make the distinction between money that’s earmarked for building wealth and money to be used for speculative purposes.

Using a multi-product strategy

A multi-product trading strategy involves using a combination of investment assets (like shares) and derivative instruments (like spread bets and CFDs) to build wealth and manage your risk.

Buying shares gives you direct ownership in a company. People who buy shares often do so in the hopes that the company will grow in value over time so that they can sell their shares at a higher price later.

This is called investing. You can also buy other types of securities such as ETFs, which trade just like a share. The main difference is that these funds spread your investment over a large number of stocks or bonds.

A diversified portfolio can be a wonderful wealth creation tool, but it takes a great deal of time and money for it to grow. Because share prices typically rise over long periods of time, you build wealth by holding on to shares for years or even decades and possibly reinvesting the dividends.

Using derivative instruments allows you to take advantage of shorter-term price movements. With leverage, you only need a fraction of a share’s full price to buy it – but with the added risk of losing more than your initial investment.

Short-term speculation on the price movements of financial instruments is called trading. Remember, when you trade, you can either take a long position when you think the value of the asset you’re trading will rise, or a short position when you think it will fall.

For example, a company making a surprise announcement in the wake of a scandal concerning one of its top leaders could scare off a few investors and thus drive down its share price. For a derivatives trader, however, this situation could present an opportunity to take a short position on the company’s stock to profit from its potential downturn.

Here’s a quick exercise to check your understanding:

A multi-product trading strategy is a good way to add variety to your portfolio. Because it combines less risky long-term investments with short-term volatility, you can find opportunity in various market conditions.