Cheat Sheet

Precious Metals Investing For Dummies

From Precious Metals Investing For Dummies by Paul Mladjenovic

Before you invest in precious metals, ask yourself some questions to understand what kind of trading style you have and define your trading objectives. Use proven investment strategies to manage your risk and understand the types of investing you can do in precious metals based on risk. Also ask your potential investment broker some key questions during an interview.

Questions Before You Begin Precious Metals Investing

Some investing questions can only be answered by your own preferences and trading objectives, not by research or professional guidance. Before you begin trading in precious metals to meet your financial goals, address the following issues:

  • How much “risk” capital will you be “playing the trading game” with?

  • What is your outlook on the asset in question (bullish, bearish or neutral)?

  • Will you be focused in a single specialty or diversified in different assets (such as stocks, options, futures or in different industries or commodities)?

  • At what point will you enter a trade? What signals will you use (such as technical indicators) as your entry points?

  • How long will you stay in your position? Will it be a fixed time period or until a particular event occurs (such as when it hits a certain price)?

  • Will you be doing any hedging (a way to reduce risk by having positions in your account that go up if your main positions go down.)? If so, what kind of hedge?

  • What will you do if the position goes down in price during your time period? Buy more or get out?

  • If you buy more at the lower price, what will you do if the asset’s price goes down even further? What price level or loss percentage will you tolerate before you decide to cut losses?

  • At what point do you cash out profitable trades? Is there a specific amount or is it based on market events (such as technical indicators or news from the industry)? Will your advisory service or software tell you?

  • At what point will you say “I can’t take it anymore! I’m getting a job!”

Investing Risk-Management Tools

Risk is necessary for investment success and knowing how to manage risk when investing precious metals is something that you can profit from. Try these proven strategies when investing:

  • Buy the dips. If you bought what you think is a great stock and its price drops, if possible buy some more. If your research and logic tell you it’s still a solid investment, buy some more. Ultimately time will pass and the odds are good that will rise, and you'll profit from having bought more.

  • Keep cash on the sidelines. Have some money sitting somewhere safe, liquid, and earning interest waiting for an opportunity. If you have a chunk of cash you're reading to invest, don't plunge it in all at once. Invest half now and stagger the rest in over a few weeks or a few months.

  • Utilize stop-loss orders. The most commonly used tool for keeping your portfolio’s value intact is the stop-loss order.

  • Utilize put options. Put options are a great way to protect your investment during corrections or bear markets.

Managing Risk when Investing in Precious Metals

All types of investing involve risk, including precious metals. This chart shows some of the major choices you have for investing in precious metals based on risk:

Type Relative risk level Most common direct type of risk
Bullion coins and bars Low Market, physical
Numismatic and collectible Medium Fraud, physical
Major mining companies Low-medium Market, political
Midsize mining companies Medium-high Market, political
Junior mining companies High Market, political
Mutual funds Low Market, political
Exchange traded funds Low-medium Market, political
Futures Highest Market, exchange
Options: covered call writing Low Market
Options: buying calls and puts High Market

Interviewing a Futures Broker

Unless a family or close friend refers someone you can trust to do your investing, you’re going to have to research some investment brokers. Ask these questions which merit some answers:

  • How many years of experience do you have working futures? You would like three or more years (but not 87).

  • Do you have an area of futures that you specialize in? Some brokers specialize in metals, for others it is currencies or grains. Make sure they have proficient knowledge in your desired markets.

  • Does your approach embrace fundamental analysis, technical analysis or a mix of both? You should know something about their knowledge of these areas and what they favor as an approach.

  • Do you have references such as satisfied clients?

  • What size account are you comfortable working with?

  • What are your firm’s requirements for margin? Can you give me some examples of how margin would work with my account?

  • What are the commissions and fees and what services are provided?

  • What is your track record (provided they have done discretionary trading for clients)?

  • How are disputes or concerns handled at this firm?

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