Browsed by
Month: July 2016

Exploring the Financial Lifecycle of a Cash-Cow Industry

Exploring the Financial Lifecycle of a Cash-Cow Industry

In every generation there’s at least one event or one product which changes things around completely, making a few people extremely wealthy while spawning a lot of secondary markets which run parallel to whatever that major paradigm shift is. It happens in just about every area of our lives, from solving a problem which is associated with our basic needs to even something like entertainment.

Major events, discoveries, inventions etc. such as oil, the VCR machine, the internet etc. are perfect examples of such paradigm shifts. The development of a major cash-cow industry often takes place within another major paradigm shift, such as social networking as one way in which the internet developed, or fuel to power our cars as a way in which the discovery of oil was developed. With regards to the financial lifecycle of these major cash-cow industries, an understanding thereof could perhaps help you become a better investor if you have some money set aside to perhaps take a chance on industries falling outside of your regular way of earning a living.

Stage One – The Initial Boom

The initial boom stage of a major cash-cow industry is often just a precursor to what will effectively be a second boom, where all the real money will change hands. Let’s take the internet as an example – when the internet first really took shape, it was nothing more than a network of connected computers and the very idea fascinated only a few geeky people in the entire world. No serious money really changed hands during the initial growth phase of the internet and investors weren’t exactly queuing up to “invest in the internet.” The only money which can be directly associated with this stage is that of early adopters who sort of see the new paradigm as something which they just enjoy exploring, entertaining and developing, or indeed something which they can develop into something really useful in future. This leads us to the next stage.

Stage Two – The Explosion

When someone finally makes use of the discovery, paradigm or invention to create something really useful, a financial explosion of sorts takes place. This leveraging of the original paradigm to create something that explodes into popularity can take any form, but the most common form is if it solves some sort of problem. Sticking with our example of the internet, you can think of the Google search engine (now part of the parent company called Alphabet) as a great example of someone (or two guys) taking the original invention of the World Wide Web and creating something which solves a problem and goes on to become a runaway success.

This is when the true power of the original invention or original idea / discovery / paradigm comes into focus as something which can be really useful – something which has some real power, during which time a lot of investment comes pouring into this and other similar developments. It essentially becomes a race against time and a competition to see who will ultimately “get it right” and explode into prominence. This is when to place investment bets because you can make some serious cash if the development you bet on eventually goes on to list or perhaps gets acquired.

Stage Three – The Derivative Phase

Operating within patent laws, the main paradigm which proves to be popular naturally sparks some competition, in the form of developers trying to develop a better product which does the same job, but one which will be in direct competition with the most popular product. Think Yahoo and Bing which tried to take on Google to dominate the search engine market. There were many other search engines as well, but I mean we can only declare one clear winner.

Stage Four – The Peak

At this stage it’s perhaps too late to look towards investing because the only real way you can do that is through buying stocks, which are already expensive and have already made a lot of people rich. Some cash-cow industries die out at this stage, while others like Google diversify and explore other avenues through which to reinvent the cash-cow and keep the profits flowing in. If you’re lucky, you can still make a lot of money through these diversifications.

Investing Vs. Trading

Investing Vs. Trading

Due in large part to the booming online trading market, people often get confused about whether what they’re doing via their online platform of choice is in fact trading or investing. The lines become blurred a bit when brokers operating an online trading platform offer both of these financial instruments with which to buy and sell securities.

The lines are blurred further when one takes into account the fact that someone using these financial instruments can indeed be both a trader and an investor at the same time, with a single transaction effectively doubling-up as being a trade and an investment at the same time. Fundamentally however, there is a difference between trading and investing and there is a difference between a trader and an investor.

Investing

It’s perhaps pertinent to start off with investing because trading is essentially a spin-off of investing. An investor is fundamentally someone who takes a long term view on putting their money into something from which they expect or predict some growth – growth which will hopefully result in some financial success in the future. So even if you make use of an online brokerage platform from the point of view of an investor, your outlook is generally a long term one, which means you would buy shares in listed companies (stocks), commodities or some sort of stake in a company or venture with plans to only really cash-in properly once some growth has taken place.

Trading

Trading generally takes more of a short-term outlook in that a trader essentially seeks to take advantage of the immediate movement in the markets. The typical instrument offered to traders online is that of Contracts For Differences (CFDs). CFDs are precisely what is written on the tin – a contract you enter into as a result of your prediction of whether or not one or more share prices you’ve selected to bet on are going to increase in value or decrease. CFDs are precisely why there’s been a recent explosion in online trading platforms, quite simply because the brokerage sites don’t really own anything and they don’t produce anything either. So it’s just a matter of going through the requisite compliance processes to qualify as a broker and then make some insane money charging people commission for each trade they make.

Intraday traders are perhaps the most common types of traders, who are naturally drawn to volatile stocks so that they can take advantage of the constant movements of the values of those stocks.

So Which is Better – Investing or Trading?

In my expert opinion as someone who works in the financial industry, I’d honestly proclaim investing to be a better option, but only if it was a question of either-or. Investing is better in my opinion because if you look at the All Share Index of any stock exchange in the world, generally such a portfolio of shares increases in value over time. Your earnings would naturally be slow in this way, but they’d also generally be steady earnings which can be as good as beating inflation at times.

So even if you seek the thrill of the intraday trader and you have a preference for making (or losing) money quickly, your trading efforts should be complemented with a good portfolio of investments. That way, you can benefit from investor-advantages such as earning dividends on certain stocks you hold, while your trading efforts could play off on your investment portfolio to hedge against what would otherwise be serious, fast losses while you’re chasing your next short-term trade.

Ultimately, mixing things up is the way to go, but I seriously wouldn’t recommend for anyone to put all their eggs in the trader’s nest.

Is it Worth Getting into Cryptocurrencies?

Is it Worth Getting into Cryptocurrencies?

If you had invested in perhaps the most popular cryptocurreny, Bitcoin, a mere three years ago or so, you’d be smiling right about now because Bitcoin has indeed grown quite nicely in its valuation against fiat currencies. There are many other cryptocurrencies which are fighting for their share of the market, all making use of what appears to be a revolutionary way of making use of the rather simple concept of a publically available ledger, otherwise known as the blockchain.

There was indeed a recent blip in the otherwise upward trend depicted by the valuation placed on Bitcoin specifically, but otherwise this seems to be the future of finance – well certainly in the minds of a lot of people who complete a lot of their trades and transactions online. The main idea is for there to be some sort of independence from the central banking system which largely governs the entire world’s financial system, so if for instance you want to buy something from someone or you want to sell something to them, there is no involvement of the banks and other financial institutions, which means there are no service fees.

What it also means is that there’s no one on the other side who could possibly delay or completely block a transaction between two parties who agree on the terms of the transaction, so naturally one would generally see a future for such technology. I’ll let you in on a little secret too – the blockchain’s use for payment channels such as Bitcoin and other cryptocurrencies has the big players in the financial industry losing some sleep over what appears to be a monopoly on the procurement of money. Cryptocurrencies are definitely seen as a bit of threat to the institutionalised financial sector establishments, but since the value of digital currencies such as Bitcoin is measured against fiat currencies, for now these institutions can rest easy.

While there’s definitely a future for cryptocurrencies, the burning question is indeed whether or not it’s worth getting into the game at what seems to be such a late stage.

Well, the short answer is yes, definitely, you just have to be a little bit clever about it. Mining is definitely out of the question, unless you’re targeting emerging cryptocurrencies. Even if you team up with other miners to better your collective chances of discovering some new Bitcoins, it’s really getting harder and harder to uncover new cryptocurrencies and the hardware you have to purchase (miner) to start mining is expensive to buy and expensive to operate. It consumes a lot of power and will plough through your data, while you’ll honestly hardly see any success in mining new cryptocurrency units. If you want to take a bet on emerging cryptocurrencies through mining, that alone isn’t enough to justify the cost of running a cryptocurrency miner all by yourself.

The good thing about cryptocurrency miners, if you get the right one that is, is that you can use it for many other purposes related to the fundamentals of blockchain technology. These uses are beyond the scope of this particular post, but all I’ll say is that it has a lot to do with validating “stuff” like transactions and records by way of a public ledger.

At this stage it can still be worth getting into cryptocurrencies however, but either by direct investment or trading, or by pooling your money with investing clubs that specialise in cryptocurrencies. Bitcoin itself is forecast to reach figures of over $1000 per coin unit in the near future, so it’s perhaps worth a punt if you are indeed looking for some short term gains, otherwise it’s still worth a punt if you’re looking towards long-term gains.

Just keep in mind that there is an originally intended purpose for the development of cryptocurrencies and the blockchain technology they use, which is to decentralise the financial service involved with buying and selling.

Online Trading – Who Makes the Real Money?

Online Trading – Who Makes the Real Money?

Have you noticed how over the last couple of years or so, there seems to have been a serious spike in the number of online trading platforms? In addition, more airtime on business channels seems to be allocated to shows about trading and investing, particularly trading and investing in the stock markets, whether directly (buying shares) or indirectly (trading derivatives). It’s not just a coincidence and good on you if you have indeed noticed what seems to be a serious drive to get people to invest their money in the Stock Exchange.

The truth is you’re still effectively taking a chance if you invest in the financial markets, whether as an investor who’s buying stocks outright or if you’re a trader seeking to take advantage of the liquidity of the markets (the short-term movement of the value of shares). While a lot of people make a lot of money playing the markets in this way, a whole lot more lose a lot of their money.

It’s perhaps a bit of an overly simplistic way of putting it, but it’s true that for every winner there has to be a loser. In the case of Contracts For Differences (CFDs) which are essentially derivatives, and I suppose in the case of outright shares investing as well, this view tends to be markedly skewed against the majority. For every big winner there are effectively a lot of losers, many of whom only lose a little bit of their money at a time and so don’t really feel the losses in the grander scheme of things.

The biggest winner however is the house and I refer to it as being the “house” because quite frankly, online trading is not unlike gambling. Nobody can ever say with absolute certainty whether or not a particular stock is going to go up or down. The only people who have this type of information are those operating on the inside and they’re not allowed to make use of it to trade as that would equate to insider trading, which is a criminal offence.

But yes, the biggest winner is indeed the trading platform over which everybody is chasing their own personal profits – the broker. It’s as simple as this – for every trade that is executed by each trader, whether buying or selling, the online trading platform (broker) charges a fee, so they are the ones who make the real money.

Imagine a scenario where just a modest total of 2,000 trades are made in just one hour, which is not uncommon. Say the broker charges what appears to be a very low service fee of $2 per trade. That would equate to $4,000 made in just one hour, better yet (for the brokers) if those were derivative trades such as CFDs.

The broker holds on to the value of the real shares they own, while derivatives traders slug it out over whether or not the price of those shares is going up or going down.

I’m in no way trying to discourage anyone from chasing their personal fortune through trading, but perhaps investing in brokerage companies themselves (getting a share of the ownership of an online trading platform) is a better avenue to pursue if you want a little bit more of a predictable manner in which to build up some good earnings. So I’d encourage investing in an actual start-up brokerage over the act of trading itself, although I must add that it is indeed possible to make some good money as a trader or an investor in shares. For many people, trading is just a convenient way of catering to the high risk portion of diversifying their investment portfolios.