Investing traditionally consists of dealing with stocks, bonds, and currency as a way of speculating and potentially earning money. Alternative investment strategies have also become a popular method of investing in other ways. Real estate became the first alternative. Now there are even more alternatives, chiefly hedge funds, venture capital, and derivatives. These strategies are more complex than traditional methods of investing, but can yield higher rewards.
To understand alternative investment strategies, it is important to get a sense of traditional methods of generating added income. Stock trading is one popular method in which an individual purchases a percentage of a public company for a specified price; as the value of that company rises and falls, the worth of that percentage increases or decreases and the stockholder can sell the shares at any time. Bonds are frequently issued by governments and companies; they are a debt security that functions much like a coupon because the owner pays a certain amount of money to the bond issuer with the promise of getting that money back plus interest at a specified time. Currency trading is also considered a traditional investment strategy and generally functions like stock trading except that transactions are made in the currency of various nations.
One original option that was didn't involve stocks, bonds, or currency is dealing in real estate. This alternative investment strategy allowed investors to purchase land or buildings as a means of making money. Investors could rent out property, construct new buildings for sale, or sell back the land when its value had risen.
Hedge funds are newer types of alternative investment strategies. This form of investing involves a hedge fund manager encouraging a small group of investors to pool their money and share the proceeds. When the money is combined, investments are spread over a number of different areas, including shares, bonds, and commodities. The strategy gets its name because the manager attempts to hedge, or reduce, risk by short selling the investments, thereby aiming to provide a more secure fund.
Of the various forms of alternative investment strategies, venture capital is a type of investment that speculates on the success of an idea or a new or expanding business. This is a way for inventors and start-up companies to get funding and in return the investors received a percentage of the profits. Derivatives are another alternative that favors speculation. This involves trading and investing based on futures such as trading rice futures.