Investment Articles

Can options trading turn you into a millionaire?

This is one of those questions I hear from people new to options trading all the time and not an easy question to answer in my opinion. Sure, options trading can create millionaires and many, including myself, have made more an a million trading options. However, can options trading turn YOU into a millionaire?

In a way, asking this question is as good as asking questions like:

Can trading stocks turn you into a millionaire?

Can trading futures turn you into a millionaire?

Can trading Forex turn you into a millionaire?

Can selling burgers turn you into a millionaire?

Can collecting coins turn you into a millionaire?

The answer to all of these questions is a resounding, YES.

The problem is, can YOU become a millionaire doing these things that have made OTHER people millionaires?

First of all, let’s ascertain the theoretical possibility of making a million through options trading. Let’s assume you have $5000 to start trading options with and you make an average of 50% per trade and compound your earnings. Here’s your account status after a number of trades:

After first trade – $7500

Second – $11,250

Third – $16,875

Forth – $25,312.5

Fifth – $37,968.75

Eighth – $128,144.5

Fourteenth – $1,459,646

As you can see, it takes only 14 trades at 50% profit per trade, which is not a lot in options trading, to grow $5000 into a million. If you do only one of those trades per month, it takes you only slightly more than a year to become a millionaire. As such, becoming a millionaire from options trading is clearly not outside the realm of possibility and clearly very fast if you do it right.

That leads us to the next question, are you able to produce a string of 14 straight wins at 50% per win? There is clearly no easy answer to this as well. I have heard of extremely lucky people who has done that before but that clearly isn’t something that applies to everyone.

Yes, in my 15 years of options trading, I must say that I have never seen anyone make a string of 14 wins within one year or two without losing no matter what options strategy they use. The good news is, you don’t need to make 50% on every win nor do you need a string of 14 wins to make a million in options trading as long as you follow a sensible trading methodology and have lots of patience.

Making a million in options trading isn’t about not losing. It’s really about making more wins than losses. As long as you have a means of consistently making more wins than losses, you can make a million in anything as long as you have the patience to stick to the game. Yes, this is the same logic in any form of trading.

If it is the same in any form of trading, why then options trading?

The beauty of options trading is that it actually helps you achieve more wins than losses through 2 unique means; Convexity and Versatility.

Convexity means being able to potentially make more money than you can potentially lose. In futures trading or stock trading, you can potentially lose as much money as you can win. When the stock goes up by $10, you make $10 worth of profit and if the stock goes down by $10, you sustain $10 worth of loss. There is no convexity. When you buy options, they will go up in value as long as the stock keep going in the correct direction (up for call options and down for put options) but if the stock goes the other direction, you will only lose as much as you used in buying the options, nothing more! For instance, if you bought one contract of call options for a stock for $150 and the stock went up by $10, you call options would be worth $1000 but if the stock went down by $10, you would only lose that $150 that you used. That’s convexity. As long as you use only money you can afford to lose or the maximum amount you are willing to lose on any single trade towards buying options, you will always have the advantage of convexity on your side.

Versatility is found in the vast array of options strategies that can be put together. Many options strategies allow you to profit not only when the underlying stock moves in one direction but in multiple directions! Yes, in futures or stock trading, you only profit when the stock goes up or down (when you are short the stock or futures). However, in options trading, there are options strategies that allow you to profit when the stock goes up OR down in both directions and options strategies that even allow you to profit from all 3 directions! Yes, being able to profit in more than one direction greatly increases your possibility of winning and greatly enhances the possibility of consistently making more wins than losses!

So, can you become a millionaire trading options? Yes you can. In fact, from the properties of convexity and versatility mentioned above, options trading could actually make it easier for you to become a millionaire versus stock or futures trading. As such, the possibility is there and the odds are in your favor. The final question to answer is, do YOU have what it takes to become a millionaire through options trading?

Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management and author of an Options Trading education site, Optiontradingpedia.com. He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.

These days I get that question a lot – what is the best bond fund for 2010? After the stock market volatility of 2008-09 people have realized that a portfolio needs to comprise of stocks and bonds. In this article, we will discuss how bonds work and how to go about picking the best bond fund.

What are bonds? They are a form of loan, made to a company. The owners of the loan are called bondholders. Each bond is issued with a fixed face value, has a coupon rate associated with it and a date of maturity.

The amount an investor pays to buy the bond is called the face value. This payment entitles the bondholder to receive interest payments at fixed intervals (usually every six months). On the date of maturity (which is known in advance), the principal (or the initial payment made) is paid back completely.

Bonds have been an ideal choice for investors looking to get a higher return than they would get from CDs, US treasuries etc. Investing in individual bonds is a little more involved and requires experience and knowledge.

This is where bond funds are a great option. They are professionally managed funds that yield dividends and are usually low-cost funds. We have a couple of options that need further discussion.

There are high-yield funds that invest in high-risk bonds. They pay higher dividends because of the higher risks involved but the bond in this fund are usually junk. So, this might not be the best choice.

Next, we have long-term funds that pay above-average dividends. These bonds are exposed to higher interest rate risk so we might not want to consider these. We also have foreign funds. But these are exposed to foreign exchange risk or currency fluctuations. These are a little risky for our liking.

We also have lower dividend paying funds like government funds. These funds invest in U.S. Treasury bonds, which are safe as it gets. Although they are safe, their dividends are pretty low and they aren’t an ideal investment for us.

So, what would the best bond funds look like? They will have higher-quality bonds which mature in the medium-term. They don’t have to be the best quality because the dividends would be too low for our liking. There are bond funds which are offered by mutual funds companies. They have yields above 6% but they can be expensive to own.

We like no-load, medium term bond index funds. They are cheap and their annual expenses are low.

To avoid costly mistakes and pick the best bond funds click here!

For more strategies on picking the most profitable bond fund visit http://www.bond-trading.org/

The Internet has changed trading in many ways. Internet trading has spread widely and fast, with investors unable to get enough of it. From newbies to more experienced investors, trading over the Internet has given the investor benefits in the form of time, speed, wealth, power, and knowledge, as well as more independence. Even people who did not trade before have jumped into the excitement and become “internet investors” in hopes of making fast money.

As many benefits and advancements that it has brought to investors, this type of trading has its pitfalls or downfalls too. Many inexperienced investors caught in the frenzy of the trade have lost a great deal of money while others have made a fortune.

Speed and fast trades are two of the Internet’s contributions to investing. That is, speed to place your orders to a broker, to communicate your desires to execute a transaction to buy or sell in the stock market. But there is a misperception in the general public, and some less experienced investors, that by the click of a mouse the transaction is executed. The speed in which you communicated the order is there, but on the other side sits the broker waiting to get you the best price for the executed trade. During that period, the market continues to fluctuate.

There is a technique to help you lessen the negative impact of these speed orders. It is called a limit order. It protects you from loss while your broker is finding you the best price in the shortest amount of time. In addition, it protects you from fluctuations in the market by limiting the cost to buy your stock – to your broker.

Broker commissions have also gone down due to Internet trading. However since it has allowed brokers to execute more transactions, the opportunity to make more money is there. The commissions are still there, just lower, since the internet has simplified many tasks. When choosing a broker, make sure that the low commission is not a reflection of performance or poor service. Investors should take this into consideration.

On the other hand, Internet trading has allowed some firms to take advantage of a larger number of small commissions in a shorter amount of time, freeing time to concentrate in larger clients that translates into larger commissions.

Specialty brokers have encountered a lot of competition, as Internet trading has become the way of doing business. Since most investors prefer a firm to handle all their trading, this has hurt specialty brokers. Most investors favor diversity in their portfolios and firms that handle a variety of trades are a better choice. Trading has become more intensive and most brokers are not interested in offering specialties. If you are going to trade in a specific arena, for example penny stocks, then you might benefit from a specialty broker in that area.

However, some firms utilize specialty brokers for clients or investors with special needs. These specialty brokers cater to these investors and are limited to their specialty. This seems to work well for this purpose, but there is always a loss of time in the execution rate for the firm.

When choosing a brokerage firm, you should do a bit of research to determine if an online firm will be able to satisfy your investing needs. By understanding your investment goals, you will be able to determine if you need some diversification. A firm that handles many types of trades will be best for you. If you are interested in investing in commodities, you would do better with a specialty broker.

When shopping for commission rates, beware of low commissions and use your own discretion by doing some research on the firm. Commissions could be a flat rate or based on the size of the trade; they could be promotions or sales that last for a determined period of time. Do a bit of investigating before you commit to any firm that seems to be charging very low commissions.

Another aspect to consider is the firm’s policy. Read the fine print. This can include issues with broker’s mistakes, margin accounts, website crashes and many other important issues that you might otherwise be unaware of.

A lot of this information is available on the company’s website since online trading lacks the “one on one” interaction of a traditional brokerage firm. If you prefer a personal touch and constant communication with your broker, online trading may not be for you.

There are advantages, as well as some disadvantages, to online trading and before choosing a firm you become educated about it and assess your investment goals.

Looking for more investment trading strategies and tips? Visit us at Global Mutual Funds – Australia’s pre-eminent provider of global investment product alternatives and solutions. Find out what you need to know about equities, options trading, and how exchange traded funds can help build your long term wealth.

Knowing how to invest money in 2010 and beyond is crucial, because if you invest money too casually or invest too aggressively you’re asking for trouble if we revisit the credit crisis. Knowing how to invest in good times is one thing; and how to invest money in 2010 and beyond is quite another. Here we cover safe investments, bonds & bond funds, and stocks & stock funds with emphasis on funds.

Sovereign debt has become an issue. Some countries in Europe are awash with debt, and they are not alone. The U.S. has $12 trillion in debt, $40,000 for each person in the USA. Like the emperor’s new suit… the truth is now obvious. With interest rates at historical lows and inflation benign, how does anyone in financial trouble, including a country, borrow money to stay afloat? By paying higher interest rates to offset the risk of default. So, here’s how to invest money in 2010 and beyond while protecting yourself.

First, how to invest in safe investments. Keep a modest amount of money liquid for emergencies in a money market fund or savings account at the bank. Then, with the bulk of the money you have earmarked for highest safety, shop for CD rates. Here’s how to invest in CDs to earn better rates without tying money up for several years at a fixed rate. No one wants to pay penalties for early withdrawal, or to sit on a fixed rate as interest rates go up.

Build a CD ladder. For example, let’s say 1-yr, 2-yr, and 3-yr maturities pay 1%, 2%, and 3% respectively. Invest money in equal amounts in each initially… then rolling over the proceeds from maturity each year into a new 3-yr CD. Each year you will have a CD maturing, you’ll be taking advantage of the 3-yr higher rate each year, and as rates fluctuate you will be going with the flow. Now the question is how to invest money in 2010 and beyond to earn even higher interest income in bond funds, without high risk.

Bonds and bond funds have paid higher interest, and have been relatively safe long-term investments since interest rates peaked in the early 1980’s. You could earn a fixed 15% interest rate in high quality bonds issued back then, compared to as little as 5% in 2009. As rates fell over the years, bonds in general gained in value as well. The opposite will happen when rates go up. The price or value of a 5% bond will fall when investors can get more from new bond issues.

Bond funds were very popular in 2009 as investors chased higher interest income. Don’t chase yields and avoid long-term bond funds, because they will get hit the hardest when rates go up. Remember, bond interest rates are FIXED and you don’t want to own a fund holding long-term maturities of 10, 15 years or more. Shorter term maturities of 5 years or so are much safer because they mature in a few years and pay the bondholders (like a bond fund you may have money in) back their principal. So, invest money in short-term and some in intermediate-term bond funds vs. longer term funds. Then, consider the following.

Interest rates and inflation often move in lockstep. Higher inflation makes future interest payments to bond investors less valuable and causes bond values to fall as well. An INFLATION-PROTECTED SECURITIES FUND holds government debt securities (like bonds) that adjust their principal and interest payments over time to changes in the inflation rate. Give these funds serious consideration.

The first two investment categories were easy compared to: how to invest money in 2010 and beyond in stocks. For most investors equity (stock) funds, like bond funds, are the best investment because they offer diversification and professional money management. The question here is which equity funds to invest money in. Don’t invest only in diversified domestic equity funds like many investors do (these invest in the U.S. stock market). Go international and get into specialty funds as well to cover all the bases.

First, definitely invest money in a diversified international fund if you don’t already own one. Then invest modest amounts in the following fund types or specialty fund sectors: emerging markets, gold, energy, real estate, and basic materials. The major no-load fund companies are a good place to invest for variety and low-cost investing: Vanguard, Fidelity, and T Rowe Price. To cut costs even more buy index funds in any category you can find them.

If good times roll the above suggestions should at least put you in a well balanced position. If times threaten to get worse, you should be sheltered from the heavy losses many investors will take.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.

There are a number of reasons why an ETF (exchange traded fund) can be a safer and more cost-effective investment than a mutual fund or a portfolio of individual stocks.

ETFs are a quick and easy way of creating a diverse portfolio. Investments in ETFs can cover a wide range of options in a number of sectors, locations and classes of assets, as well as different investment strategies. They usually track a collection of securities that underlie the benchmark index. This benchmark can be formed from bonds and stocks, as well as other securities (e.g. commodities). It is much harder to create such a diverse range of investments by investing in each element individually and the risks are much less with ETFs. One or two ETFs can provide as much asset class coverage and weighting as a large selection of carefully researched stocks and bonds.

There is excellent trading flexibility with an ETF. Unlike mutual funds, where the sale is processed at the end of day net asset value prices, ETF sales go through immediately. ETFs trade globally on all the main stock exchanges so the price you get will be the price quoted at the moment of sale. A range of choices for trading is available, including limit and market orders, buying on a margin, and short selling. It is sometimes possible to buy and sell options on ETFs on derivative markets. There is no minimum investment threshold required to buy ETFs.

It has been proven in numerous studies that mutual funds rarely outperform the return of an index. ETFs can do much better than mutual funds. They can efficiently realize index performance and the yearly management fee is lower than for mutual funds.

This cheaper management fee means that investing in an ETF can be more cost effective than putting your money in a mutual fund. Over a long-term investment, this difference can add up to substantial savings.

Plenty of information is available for investors to see what is happening to their ETF investment. The holdings are reported on a daily basis, with the specific weighting of the constituents of the tracked index being disclosed. This will show when there has been a modification of the position of the ETF in a particular security. The transparency this gives generates confidence in the maintenance of the original strategy.

Mutual funds generally limit their reporting to just twice yearly, which can leave the investor unaware of what is going on for many months at a time. By the time the report is made available, the fund could have changed drastically in terms of the holdings, weightings or investment style.

It is usually more tax efficient to invest in an ETF rather than a mutual fund. Capital gains tax is usually only paid on ETF investments when shares are sold, while it must be paid on the gains made by a mutual fund even while the funds are being kept in it. The investor could also end up paying more capital gains tax if they invest in individual shares and stocks, as there will be frequent tax payments to be made and there will also be transaction commissions to pay. ETFs may offer regular dividends or distributions and tax will have to be paid on these if it is held in a non-registered account.

The diversity of ETF investments means that they can be far less volatile than other investments, which reflect the daily changes of individual stocks. The overall ETF movement will depend on all of the holdings that are part of the fund, so the other holdings will moderate a single volatile movement in one. This reduces the risk to the investor.

Looking for more EFT strategies and tips? Visit us at Global Mutual Funds – Australia’s pre-eminent provider of global investment product alternatives and solutions. Find out what you need to know about equities, options trading, and how exchange traded funds can help build your long term wealth.

It may seem like an impossible task to invest on a low income, but the benefits far outweigh the sacrifices. Unlike savings, which serve short-term financial goals like buying a new car or establishing an emergency fund, investments are intended to meet your long-term financial goals, including providing for a child’s college education or your retirement.

Regardless of income, the money that you do have needs to be managed. The best investment products for you will be determined by your long-term financial goals. Discuss these with a financial advisor who may be able to assist you with finding investments that best serve your goals – even if they seem small or insignificant compared to the figures you read about or see on television.

Types of Investments

Retirement plans: 401(k) and IRAs Many people choose to invest through their employer, taking advantages of the matching funds and tax benefits that accompany many 401(k) plans and IRAs (Individual Retirement Arrangements). Contributing at least the amount your employer will match is one way to get a significant return on your investment. Because the employee typically decides the contribution, you can begin with a small amount each paycheck, gradually raising your contribution as your salary increases. If your employer does not provide a retirement plan, you can still set up an IRA as an individual, and reap the tax benefits.

Stocks, Bonds, and Mutual Funds When you purchase a stock, you are buying a share of ownership in a company. A bond is a loan of money to a company, or government, that promises to pay back the principal plus interest. Mutual funds pool money from many investors to buy a variety of stocks, bonds, or other securities. Investing through a mutual fund, rather than purchasing stocks and bonds on your own, provides several benefits, such as being able to choose from a variety of professionally managed funds tailored for different levels of risk and rates of return. Some mutual funds have an initial investment of as little as $50, making them an ideal place to begin investing on a tight budget.

Beginning Investing

Consider your long-term financial goals, and determine what type of investment combination, or portfolio, will best serve those goals. Then, begin investing. No matter what the initial investment is, the important thing is to start. A financial advisor may be able to help you find areas in your budget to cut back in order to increase your ability to invest, and direct your investments so they may best serve your long-term financial goals.

Questions? Email me at wesley@thewandwgroup.com and visit our website at http://www.thewandwgroup.com New Money Talk is a weekly article focusing on retirement, personal finance, and estate planning.

Comments and questions are welcome, but because of the volume of email, personal responses are not always possible.

What to do with your money is always a temptation. Is it better to pay off loans or to invest your extra cash is often the question whenever a person comes into extra income. It is hard to sit on the sidelines and watch others take advantage of low stock market and real estate prices while you plug along slowly chipping away at your own mountain of debt.

The goal of becoming debt free is admirable. Just think of the opportunities you would have for investments if you did not have to sink most of your available cash into old debts. You probably wonder every month whether it is better to pay off loans or to invest any extra cash you have earned.

Here is the quandary that arises when you try to balance reasonable actions with the dreams of getting rich through investments. The thing holding you back are old debts. You must use today’s money to pay off things you may no longer even have, like all those expensive dinners out or clothes that are now out of fashion.

Most financial advisors would tell you that the answer to the question of whether it is better to pay off loans or to invest is to pay off loans and old debt as fast as you can. There are fast plans to reduce debt, and best-selling books on the subject of debt freedom are everywhere. The main point to paying off old debts, besides meeting your legal obligations, is that once you are fully paid off on those debts, your money will be all yours. You can do with it whatever you want, rather than paying your future income to others. If you have loans, you have promised future income to others, like the bank.

Most of the debt free program advisors will tell you that you need to clear the deck of loans and other bills prior to even thinking of investing. But here comes the rub. A good part of investing is timing. If you miss the big opportunity to get in on the investment before it moves upward, you miss the big chance to make money on that investment. No one wants to get in at the top, they want in at the bottom to make the investment profitable.

Recent economic hard times and the stock market downturn may cause some people to rejoice that they had decided to pay on debts instead of investing while the investments were turning downward. They are ahead of the game and will be ready to jump on board when the investment train goes back uphill again as it always does.

In bad times, it is better to pay off loans than to invest. Keep an eye on investments, and do research so that when you are loan free you have money saved and ready to invest and know where you want to invest it. Live life on a cash basis and never get caught in the loan/debt trap again.

Klint is fairly new to the idea of writing articles online, and has been spending much of his time writing for his own sites. You can visit one of his latest projects over at http://indoorwindowshutters.net/ – which helps people find the best information for faux wood shutters

This article discusses the basics of any good long term investing strategy, and it deals with the principles that one must adhere to in order for this to work. It talks about patience, putting together a plan for risk, and quantifying the terms of your investment plan.

One of the most challenging things that new investors have to cope with is the fact that you can’t really expect to get rich overnight. Deciding to invest your money wisely is a solid decision, and it is one that will undoubtedly benefit you down the road. But for many people, investing is something that is seen as a quick fix. If you really want to be successful and grow your money, you can’t have this type of outlook. Instead, you need to work on perfecting a sort of long term investing strategy. Patience is the key here, and you have to dig in for the long haul if you want to watch your money grow.

The principles of diversification

The first thing to consider when putting together your long term investing strategy is how much risk you are willing to take. It is human nature to be adverse to risk, but some people are willing to take on more risk than others. It takes a little bit of self examination to come up with the answer to this all important concern. For the most part, a successful long term investing strategy will include a huge base of stocks that are sure things, a few stocks with the chance to grow, and a few more that are a little bit volatile. When you are trying to grow your money for the long haul, you are better off going with those blue chip stocks of companies that are known commodities. These companies might not double in a year, but they’ll give you solid growth each quarter.

Being patient with your plan

If you are ever going to have a solid long term investing strategy, you need to understand some things about the market. The fact of the matter is that it is going to go up and it’s going to go down. Things will fluctuate over time, and there’s nothing you can do about that. You can’t stress out every time one of your solid stocks has a rough day. With a long term investing strategy, you are in it to watch the money grow over the course of a few years. If you have done your homework and you’ve picked stocks with solid reputations for growth, then you have no worries. The market will turn, and your stock will recover eventually. By pulling the trigger too soon, you can waste your own time and capital.

Setting short-term and long-term goals

One of the most important principles to consider when coming up with a long term investing strategy is your goals. It is difficult to work with this sort of plan unless you put it all down on paper and set out to follow it on every point. How much money are you going to invest every month? What is your eventual goal? How long do you plan to leave your money in the market? By figuring out these things, you will be able to make more informed choices for which stocks to pick. Likewise, you will be able to dedicate yourself to the plan, because you understand its long term nature.

Klint is fairly new to the idea of writing articles online, and has been spending much of his time writing for his own sites. You can visit one of his latest projects over at http://indoorwindowshutters.net/ – which helps people find the best information for faux wood shutters

Investing can be difficult to understand because there are many moving pieces and lots of controversy in what works best. Just when you begin to think that you understand enough of the basics to begin investing you discover that there is even controversy in when to make your investments. Do the factors that affect investing never end?

When to make my investment? Yes, you have the choice of dollar cost averaging, lump sum investing (start of year vs. end of year) or continuous automatic investing and these are just the basic options with nothing fancy added on. Does this really matter? Do you need to go out and learn about all the intricate details behind each of these?

When looking at your physical fitness one of the areas that is important is cardiovascular exercise, cardio for short. This type of exercise helps with improving the functioning of your heart plus burns calories. When you first start working out you can quickly be overcome by all the choices for how to perform your cardio. Do you go for low intensity, high intensity, interval or some other combination and what is this plateau thing that everyone is talking about? Unfortunately there is not one answer to which is the best all of the time. Why? Each person has different goals, and we all have different time frames for accomplishing our goal plus other factors such as how much time we have to exercise on a daily basis. Instead we need to understand the basics of each style and select the one style or combination of styles that works best for us and our circumstances.

This also goes for deciding when to make your investment. Following are three easy steps to follow to help you decide what works best for you.

First, learn enough about each approach that you understand when and where to use it. By learning that interval training helps the heart become healthier faster you may use that when you are short on time for a workout. More bang for your buck! Likewise when you learn that over time the best way to invest your money is in a lump sum at the beginning of the year you can adapt that strategy if your income is structured to have bonus payouts in January. You won’t be able to make any of those decisions without understanding what each one means for you, so start reading and asking questions about different types of investment timing approaches.

Second, after you understand the basics of each evaluate your situation and determine what you can do. Although you might want to do high intensity training to get you to your goal quicker, if your doctor has said that you need to stick with low intensity first then that is what you do! Likewise if you want to lump sum invest, but don’t have extra cash sitting around then you need to start with continuous automatic investing.

Finally, start investing. Don’t get stuck with paralysis by analysis and not do anything. You won’t lose the weight unless you do some sort of cardio. You won’t become rich by not saving any money so at a minimum set up an automatic investing program and get going.

Don’t use not having a complete understanding of investing as a reason not to invest, you will always find something new that you can learn about and debate about before you begin investing. Ask for help and get going! You can always go back and learn the intricacies of dollar cost averaging after you have started investing; the battling sides will still be there.

Andrea Travillian
http://www.smartstepomaha.com

Visit my website at the above link for more ideas on how to improve your money health and live your dream life!

If you’ve been disappointed by the low interest rates offered on CDs or checking accounts recently, you might want to look into social lending.

Social lending is a new investment opportunity that matches individual lenders with individual borrowers. Platforms like Lending Club and Prosper cut out the complexity and overhead of traditional banks to offer better returns to investors and lower rates to borrowers.

How good are the rates for investors? Well, I’m currently averaging a 13.77% annual return on my investments at Lending Club and the average return there is over 9% for all investments since 2007.

Your personal rate of return there can vary significantly based on the types of loans you choose.

Here’s how social lending works for investors. First, you open an account online and deposit funds (typically $1000 is the minimum). Then, you decide if you would like to select loans to invest in specifically, or if you would like the system to choose loans for you based on your risk tolerance and other criteria.

Generally, investors choose to invest small amounts across tens or hundreds of different loans. For example, if you invested $1,000, you might choose to invest just $25 in 40 different loans, to reduce the impact of the risk of default from any one loan.

Loans you can invest in will carry different interest rates, based on the borrowers credit worthiness. Interest rates at Lending Club vary from about 6% to 21%, and borrowers must have a credit score of 660 or better. Your overall annual rate of return will depend on the mix of loans you invest in and how many of those loans end in default.

How risky is social lending overall? Does it really fit in the same category as investing in a CD or checking account? Social lending does carry certain risks that are greater than investing in an FDIC-insured product like a checking or CD account.

Social lending probably compares more favorably risk-wise between bond investing and stock market investing. The primary risks to you as an investor are that individual borrowers will default, or that the platform who administers the loans might stop servicing the loans altogether. The former will almost certainly happen, and can be mitigated by choosing your loans carefully and investing in many different loans at the same time. The latter is less likely to happen, and choosing the platform you invest through is critical. Prosper and Lending Club are the two biggest platforms in the U.S.

As an investor, you owe it to your portfolio to at least investigate whether social lending is for you. You may find that it can help you raise your returns in this low interest rate environment.

Jack Blatt writes about social lending and personal finance and is ecstatic about the returns he has achieved with Lending Club.