Expert: Gina Boykin - 8/30/2007

Question
I have a friend who has $20,000 to invest. He has a saftey net as well, so this $20,000 is money that he wants to "play" with so to speak. Is there a way to invest this money for short term gains, like income stocks? He is not interested in long term investments. ie. 5 10 years down the road. He wants to make money off of his $20,000 in the near future, basically, this year, and the next year, etc. I know nothing is guaranteed in the stock market and that you should ride the ups and downs, but is it possible to invest for short term gains, and have these gains as your "income" every year? I know this is a very general question, but hopefully you can guide me in the right direction.

Answer
Cash flow can be made in the following ways: capital gains (increase in value), rental income, dividends, and interest.  All of these can be made in the short and long term.  However, it is much harder in the shorter term.

There are many options, and they depend on your friend's strategy.  

STOCK OPTIONS
If he wants to make money in capital gains, he can look into stock options as opposed to stocks.  The gains (and losses) are greater with options, so it is higher risk.  Stock options are basically the option to purchase or sell a stock at a given price.  If you buy a "Call Option" for Exxon, for example, you could have the right to buy the stock at $70/share.  If the price goes to $80, this is a great deal, and your option would increase in value.  You could either sell your option, or you could just buy the stock at $70 sell it later.

Options are great because you don't have to actually buy the stock.  This may not be an issue for someone with $20K to invest, but it is something to consider.

You can go to www.investopedia.com for more information on stock options.

To make steady income, the focus should probably be on dividends or interest as opposed to increase in value.  For dividends, your friend can look at stocks that have historically paid large dividends, and buy those stocks.  

For interest, he should consider bonds or foreign exchange currencies.  

BONDS
There are different types of bonds: government securities, municipal bonds, corporate bonds, mortgage & asset backed securities (which is what has been in the news lately), and foreign bonds.

When you purchase a bond you have essentially loaned money to an organization at a certain interest rate.  This interest rate is paid to you every month/quarter/year.  The rates are generally higher than the interest you would receive in a savings account/CD.  If they are not, you may as well stick the money in savings.

If he is in a high tax bracket, municipal bonds (bonds issued by schools or local/state governments) may work well because the interest is exempt from fed taxes.  If he lives in the area of the school or government authority, it will also be exempt from state/local taxes.  

If he is not in a high tax bracket, corporate bonds will provide a high return with the best risk, as long as you stick with highly rated (Standard & Poors rated AAA,AA,A,or BBB or Moody's rated Aaa, Aa, A, or Baa) bonds.  This rating is like a person's credit score - the higher the rating, the more likely the company will be able to pay the interest and return the loan at the end of the period.

For more info on bonds, you or he can check out www.investinginbonds.com.  Remember, bonds can increase/decrease in value as well, so that has to be considered along with the interest rates before buying.

FOREX (foreign exchange)
Many people invest in currency.  This currency fluctuates in value similar to stocks, but also provides interest.  When you invest in forex, you buy a currency pair.  For example, the USD/YEN is the US Dollar/Japanese Yen.  If you purchase this pair, you are buying the dollar and selling the Yen.  Most brokers allow you to trade at 100:1 margins (or more).  This means that for each $1,000 you invest, you control $100K of currency.  Owning currency is similar to having your money at the bank.  You are paid interest.  The difference here is that you are paid interest on the amount you control (not your investment) which means you get a pretty high interest rate.

This is a much higher risk investment than placing money in the bank, of course, and should be researched before investing.  If you'd like more info you can get the basics at www.babypips.com or www.forex.com.

Hopefully these suggestions have helped you and your friend.  Remember that nothing is guaranteed, and it is very hard to sustain income every year from short-term investments, because even the experts get it wrong sometimes.  Whatever path he takes, he should practice with "fake money" in a virtual account first.  There are several brokers that provide virtual stock option, stocks and bonds, and forex accounts.

www.optionsxpress.com (virtual stock option)
www.investopedia.com (virtual stock market)
www.gftforex.com (virtual forex)