Innovative investments

From CEOpedia | Management online

In our constantly evolving world, continuous improvements are expected and begin to affect every sphere of our lives. Thanks to the software development, creation of advanced algorithms and progress of artificial intelligence, these changes also occur in the sphere of investing. People believe that advanced programs will help them achieve more satisfying results from trading their investments. Due to the newly emerging demand for new ways of investing, mainly via the Internet, many new alternatives have been created, as well as devices and algorithms that aim to achieve better results than more conservative approaches.

There are 3 very popular innovative investments:

  • Algorithmic Trading
  • Equity Crowdfunding
  • Cryptocurrencies

Algorithmic Trading

An algorithm is a set of directions for solving a problem. Algorithmic trading is an investment method involving the creation of comprehensive formulas and complex mathematical models in order to create a pattern that the computer will be guided by when buying and selling financial securities. This method is created based on an analysis of the behavior of thousands of indexes and charts, with the intention of finding regularities repeated there and using these schemes to achieve a better return on investment.

The popularity of algorithimc trading is constantly growing, mainly due to promises of a relatively large and stable earnings with minimal effort and time. Many companies advertise newly discovered, "revolutionary" formulas that are supposed to bring very satisfying results. These companies are focused on obtaining as much funds as possible from consumers and trading them in accordance with the advertised formula.Of course, for this service they charge the appropriate commission, regardless of future results and are not responsible for any potential losses. Investing in this type of funds is associated with higher risk, strongly correlated with high-frequency trading risk. It should also be borne in mind that it has not been clearly proven that such investments bring better results than conservative investing.

"Following" other investors

Recently, the method of imitating other traders is becoming more and more popular. In websites and mobile applications such as eToro, the option to copy other users of the application has appeared.It aims to copy purchases and sales of the chosen trader, and tries to do so with the least possible delay and the smallest possible deviations from the price at which the tracked trader bought the assets. Of course, the trader mentioned above must agree to copy his investment strategy by hundreds if not thousands of other users. This method may seem particularly attractive to inexperienced investors or people who have no time or simply do not want to engage in investing professionally, although there is no clear evidence of the infallibility of the method.

Equity Crowdfunding

Equity Crowdfunding is a form of financing companies at the development stage, in which the necessary capital flow is provided by small payments from many people. Companies participating in crowdfunding, present their company, its management board, level of development and business model, show their visions for the future of the company or its plans for development. They show potential investors their financial reports, profit and loss balances and potential future profits from operations, often taking into account the capital raised in the above-mentioned crowdfunding action and present a plan for the use of the funds obtained in this way. In exchange for investments in the company, individual investors receive shares in the company which also connects with part of the future profits of the company.

More and more companies are interested in this type of investment method, especially start-ups. This method is characterized by a relative simplicity in implementation and a lower risk associated with raising capital for investments. In addition, a small amount of formalities, no commission on the purchase of shares and the fact that there is practically no lower threshold for investment in crowdfunding actions makes this method seem attractive even for the most inexperienced investors. However, the investor should take into account the potential risk of this type of investment. The company may present potential profits, but investors must take into account the possibility of losing invested capital due to unpredictable events. The company, despite assurances, may not, however, enter the stock exchange which may cause a serious problem with the liquidation of the investment. In addition, the share price after the debut on the stock exchange may differ from the one for which the shares were bought on the crowdfunding platform. What's more, history shows that the vast majority of crowdfunding investments or similar IPOs (Initial Public Offering) resulted in the loss of a large amount of invested capital.

Cryptocurrencies

Cryptocurrencies (Bitcoin,Ethereum,Litecoin etc.) are modern payment system based on a blockchain technology. Cryptocurrencies do not have a physical equivalent, which makes them quite a controversial investment asset, although there will be many admirers who praise their impact on ease of concluding transactions and full anonymity.

The most popular cryptocurrencies:

  • Bitcoin (BTC)
  • Ethereum (ETH)
  • Ripple (XRP)
  • Litecoin (LTC)
  • Bitcoin Cash (BCH)

The multitude of advantages of cryptocurrencies has caused a sharp increase in interest around cryptocurrencies, especially bitcoin and ethereum. This resulted in a sudden and tremendous increase in the value of the above-mentioned currencies, which resulted in the creation of a self-propelling spiral, commonly known as a speculative bubble. Inexperienced investors, seeing an incredible increase in the value of cryptocurrencies, speculated and invested in the potential profits of these assets in the future, hoping that they would also catch up on this "opportunity." The increase in popularity of these 2 cryptocurrencies resulted in the multiplication of hundreds of other cryptocurrencies that investors eagerly bought expecting quick profits. Unfortunately, like any bubble, in 2018 the speculative bubble on bitcoin burst, where its value fell by about 65%, which caused the rest of the cryptocurrency to collapse. The losses were frightening and many naive investors lost their life savings. Nowadays cryptocurrencies are still popular, but investors approach them with greater caution and if they invest in them it is usually as part of investment diversification. As cryptocurrencies are an intangible asset, it is relatively difficult to determine the risk of this type of investment.

Examples of Innovative investments

  • Robo-advisors: Robo-advisors are automated computer programs that manage portfolios of investments for their clients. They use algorithms to determine which investments are most likely to provide the best returns for their clients. They also provide clients with regular updates about their portfolios and provide advice on how to adjust the portfolio to maximize returns. Examples of popular robo-advisors include Wealthfront, Betterment, and Charles Schwab Intelligent Portfolios.
  • Cryptocurrency: Cryptocurrency is a digital or virtual currency that uses cryptography to secure and verify transactions. Examples of popular cryptocurrencies include Bitcoin, Ethereum, and Litecoin. These currencies are decentralized meaning they are not controlled by any government or central bank. They can be used to purchase goods and services, but they can also be used as an investment.
  • Exchange-Traded Funds (ETFs): Exchange-traded funds are baskets of securities that are bought and sold on a stock exchange. ETFs track an index or a basket of assets and provide investors with exposure to a variety of different asset classes such as stocks, bonds, and commodities. Examples of popular ETFs include the SPDR S&P 500, the iShares Core S&P 500, and the Vanguard Total Stock Market.
  • Hedge Funds: Hedge funds are investment vehicles that use strategies such as leveraging, short selling, and derivatives to make money. Hedge funds are typically accessible only to high-net-worth individuals and institutions and are not subject to the same regulations as mutual funds. Examples of popular hedge funds include Bridgewater Associates, Renaissance Technologies, and Paulson & Co.
  • Crowdfunding: Crowdfunding is a method of raising capital by soliciting small amounts of money from a large number of people. It is often used to finance start-ups and creative projects. Popular crowdfunding platforms include Kickstarter, GoFundMe, and IndieGogo.

Advantages of Innovative investments

Innovative investing provides many advantages that make it an attractive option for investors. These advantages include:

  • Increased access to markets that were traditionally difficult to get into: By utilizing new technologies, innovative investing allows for easier access to markets that were previously inaccessible due to geographical distance or cost.
  • Automated trading: Innovative investing technologies also allow for automated trading, allowing investors to set up their own trading strategies and execute them automatically with minimal effort.
  • Reduced transaction costs: Innovative investing technologies are often able to reduce transaction costs by eliminating the need for manual processing and reducing the amount of paperwork involved in transactions.
  • Increased transparency: New technologies also provide investors with increased transparency into the markets and their investments, allowing them to better understand and monitor their investments.
  • Improved risk management: Innovative investing technologies also provide investors with improved risk management tools, enabling them to better manage their investments and reduce the risk of losses.

Limitations of Innovative investments

Due to the rapid advances in the investment world, there are some limitations to innovative investments. These include:

  • Difficulty in understanding: These new ways of investing require knowledge of the new technology and how it works. Many investors may find it difficult to understand the intricacies of the new technology and how it works.
  • Limited Expertise: Due to the newness of the technology, it is difficult to find experts who have extensive knowledge and experience in the technology. This can make it difficult for investors to make informed decisions.
  • Risk of Loss: Investing in new technologies carries the risk of loss. As with any investment, there is no guarantee of a return on investment.
  • Cost of Investment: Investing in innovative technologies can be expensive. The software and technology required to use these new investments can be expensive and may require a significant initial investment in order to reap the rewards.
  • Volatility: As with any investment, there is no guarantee of a return on investment. Innovative investments can be volatile and can lead to large losses if not managed properly.

Other approaches related to Innovative investments

There are several other innovative approaches to investing that include:

  • Roboadvising: A recent innovation in the field of investing is robo-advising, which uses computer algorithms to automate the process of asset allocation, portfolio selection, and investment advice. This type of service is becoming increasingly popular as it offers the advantages of lower costs, transparency, and objective advice.
  • Impact Investing: Impact investing is a form of socially responsible investing which seeks to generate both a financial return and a positive social or environmental impact. Often, impact investments focus on addressing social and environmental issues such as poverty, access to clean water, and climate change.
  • Exchange-Traded Funds (ETFs): Exchange-traded funds (ETFs) are a type of investment fund that is traded on exchanges, just like stocks and bonds. ETFs offer investors the advantages of diversification, low costs, and flexibility.
  • Crowdfunding: Crowdfunding is a form of alternative financing that allows investors to pool their funds to support projects or businesses. This can be done through online platforms or through traditional crowdfunding platforms such as Kickstarter.

In summary, there are many innovative approaches to investing, such as robo-advising, impact investing, exchange-traded funds, and crowdfunding, that offer investors new ways to diversify their portfolios and achieve their financial goals.


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References

Author: Przemysław Majewski

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