How To Explain Different Financial Vehicles Using This 1 Great Analogy

financial vehicles

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When I’m explaining financial markets to someone that is unfamiliar with them, I like to explain difficult concepts using analogies. One of my favorite analogies is comparing financial markets to vehicles. I use cars in particular because everyone knows what a car is and has either driven a car or ridden in one.

Each vehicle has a different level of performance. Some vehicles are fast while others are slower, some require more maintenance, some require constant monitoring, others can be driven everyday with minimal user intervention.

Do You Have A License To Trade That?

To drive a car a license is required, but to trade in the financial markets there is no license required. This leads to millions of people that are trading the markets that have no idea how to control the vehicle that they are using.

Most people will be able to open an account with a brokerage company with little difficulty, and begin trading with out any kind of formal testing or knowledge. This is the equivalent of getting into the drivers seat of a car, and not knowing the difference between the gas petal and the brake pedal.

Driving Fast Cars Without Experience

In the beginning of a trading career many people want to make money really fast, without having to learn how to handle the vehicle they are trading. So they trade penny stocks, and hope and pray that the 80:1 payout will make them money very quickly.

The issue with this approach is it is very similar to giving a 16 year old, with no driving experience driving, a Ferrari 458 Italia. Will it be fast yes, but it will also likely end in a loss of control and an accident. Is it to say that the 16 year old will never be able to drive the Ferrari? Certainly not, it only requires training and experience with the vehicle.

Investing is similar to driving in that it takes practice and education to overcome fear and doubt. Once you have an understanding of how to “Drive” one vehicle, new vehicles will require only minor adjustments for you to become proficient.

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2 Types Of Cars You Should Have In The Garage

In general, all investment vehicles can be compared to vehicles. There is a great number of vehicles in the world as there is a great number of investment tools. The two types of vehicles we will focus on are:

  • The daily driver (the car we will use to make a living)
  • The race car (the car we will use to make a fortune)

Each vehicle requires specific disciplines to be mastered before the vehicle can be fully utilized. If you want to drive a race car, time and money must be spent learning everything about that vehicle. What are the requirement for entry? What are the rules on the race track? Is there specific experience requirements?

Which Vehicle Should You Learn To Drive First?

The Daily Driver is the vehicle that will make you a living. Many traders tend to skip this vehicle because they have a job that makes them a living, they believe the reason they should invest/trade is to make a fortune. Making a fortune is exciting and “when” they find that one hot tip they will be in the money. The issue with this approach is that most people that have a job to make a living, do not have sufficient time or money to learn the vehicle that they want to trade.

My recommendation to most people is to learn how to handle and drive a daily driver. Once the daily driver is creating enough income to financially support a “Race car”, then start learning that new vehicle. With this approach even if the new vehicle is not what you expect, you will still be able to learn another vehicle down the road.

Guest Post by John Pierce

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.