Unleveraged Commodities

• Commodities are physical assets such as gold and petroleum, and are distinguished among investments since they're guaranteed to be worth something. Imagine the frenzy if gold somehow sold for $1 per ounce. It would instantly climb back up as crazed demand overran supply, since gold is usually priced in at least several hundred dollars per ounce. Invest in commodities if you anticipate a price or inflation spike in the near future. For example, people who bought petroleum at $60 to $70/barrel before gas prices rose in spring-summer 2008 sold at $130 to $140/barrel, realizing about 100 percent profit in several months.
  
  

Dividend Equity

• If time is on your side, buy dividend stocks. Dividends Reinvestment Programs (DRiPs) allow you to automatically buy extra stock with dividend payments. Although this process can take time, these securities work for you by limiting losses as they are less likely to depreciate to zero. While similar in effect--but not probability--of providing a downside limit, dividend stock stability is based on different economic dynamics than the logic underlying intrinsic commodity value.
  
  

Small-Cap Equity

• Small-cap allure is based on stock appreciation magnitude. Price can rise from $0.10 to $1.00 per share. If bought and sold at those prices, respectively, a 1000 percent gain is realized. Appreciation from $1.00 to $10.00 gives same percentage of profit, but a 90 cent price increase is more likely than one of $9. A larger gain corresponds with a smaller buying price. Small-cap equities have a high chance of failure. Unlike dividend stocks and (unleveraged) commodities, a 100 percent loss is a distinct possibility.
  
  

Leveraged Investment

• Index gain percentage multiplied by leverage ratio gives leveraged return. A 30 percent gain leveraged by a factor of 10 gives 300 percent profit. On the other hand, a security price decrease of 30 percent can be devastating. A 10:1 leverage ratio results in a 30*10 = 300 percent loss! Be very careful with leveraged investments. Just as you get to keep the wonderful gains, you are responsible for the possibility of tremendous loss.
  
  

Selling Options

• Let's say you purchase ABC stock. You can sell the right for others to purchase ABC stock from you at $15/share within 6 months. Another investor, Bob, buys that option for a premium. If ABC stock rises to $20/share within 6 months, Bob can exercise the option and buy the stock from you at $15/share, effectively saving $5 a share at your expense.
  
  Here it must be clarified where your loss lies: If you pay $3 per share and sell at $15, of course you made a profit, but only in terms of the stock, not the option. The loss is implicit in having to sell below market price of $20 per share. Without Bob exercising the sell option, you could have sold the stock for the $20 per share, gaining a bigger profit.
  
  To make the loss explicit, imagine you bought ABC stock at $17 per share. Now, having to sell at $15, there is the loss of $2 per share while without the option you could have sold at $20 per share, realizing $3 per share profit.
  
  If ABC stock never grows above $15/share, or does so after the expiration date, then Bob has no motive to exercise the option. An expired sell option is worthless; the premium Bob paid 6 months or so earlier is your profit.