Types of investments to Consider in 2024
The experts at the Traders Union have prepared this detailed guide for novice investors. Here you will get a sense of the concept of investment, learn about the types of investment income, identify promising tools for investing, and better understand how to avoid popular mistakes when building your capital. Are you ready? Let's begin!
Start investing right now with Interactive Brokers!What are investments?
Investing is injecting money into the purchase of assets to generate profits in the future. Attracting investment funds allows companies and private businesses to expand their activities, and part of the profits are returned to investors.
Individuals who invest their savings to purchase assets are called private investors. Anyone can invest, regardless of address or monthly income level. An investor can be an individual or an organization.
There are several categories of investors:
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State - when a state or government agency invests in the development of projects;
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Private - assets are purchased by an individual or private company;
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Foreign - this category includes the financing of local projects by foreign companies;
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Institutional - these include organizations that professionally manage the capital of their clients. They include non-state pension funds and other companies that acquire assets using the funds of their depositors. The profit obtained is distributed among the participants taking into account the size of their shares.
Main investment classes
An investor determines the direction of their finances by selecting its parameters. It can be both the financing of real companies and speculative actions aimed at short-term profit.
These are the main types of investments:
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Real investment - you invest in a real estate purchase, the purchase of existing businesses, the renovation or construction of new buildings, the registration of a trademark or patent, etc., that is, your assets help to finance the real sector of the economy;
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Financial investments - when funds are used to purchase securities or other financial instruments. Also, bank deposits and the purchase of precious metals in bullion or coins are included in financial investments;
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Speculative investing - this method involves purchasing assets whose value changes over time. Depending on the strategy, funds may be invested in purchasing stocks, bonds, indices, commodity contracts, foreign currencies, cryptocurrencies, and other instruments with the expectation of increasing the price of the asset in the future. The simplest example is that you save part of your salary and buy dollars or euros. When the local currency falls, you can get more units of the national currency for a fixed amount in dollars.
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Venture capital investments - this method is more often used by large investors to support promising companies at their start-up stage. This type of investment can be very profitable or unsuccessful, depending on the success of the startup. For example, in 2000, SoftBank invested $20 million in the startup company Alibaba. In 2014, the startup went for an IPO, and the fund's share price rose to $74 billion. There are also examples of the opposite result occurring. The Theranos project in the medical industry attracted at least $500 million in investment funds and then went bankrupt;
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Portfolio investments are available to both organizations and private investors. In this case, funds are allocated between different assets with different risk degrees. For example, part of the portfolio consists of low-risk assets such as bonds, precious metals, part of the funds is invested in the purchase of stocks, and a small portion is allocated to the purchase of instruments with high risk and potentially high yield, such as the purchase of cryptocurrencies or operations in the Forex market.
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Intellectual investments are aimed at the creation and protection of intellectual property. They include investments in the development of new technologies, the creation of innovative products, scientific research, training of specialists, etc.
Types of financial investments by asset
Today's investors have access to a wide range of instruments for investing. Some are available to novice traders and require no effort, while others require special training and the ability to analyze the market.
Below is a shortlist of financial assets for investment:
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A bank deposit is an easy and affordable way to create savings and form a cash "safety cushion". The main task of an investor, in this case, is to choose a reliable bank with the most favorable interest rate. The rate on deposits depends not only on the bank but also on the deposit terms and currency. At the beginning of 2023, some banks offer interest rates on deposits in the range of 6-9% per annum. The advantages of this method are its simplicity, a guaranteed level of income, and the support and guarantees of the state deposit insurance program. The disadvantage is that income from investments barely covers depreciation as a result of inflation, especially for deposits in the national currency.
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Shares are a more profitable instrument for private and corporate investors. Each shareholder is a co-owner of a company and gets dividends from its income. Two strategies are possible — buying to sell the asset at a higher price in the future and buying to receive quarterly dividend payments. The advantages of the shares method are the potential for high yield, good liquidity, and possible profits from both increasing the value of shares and dividends. Some disadvantages are you need to choose the right company and time for a purchase to reduce the risk of losses from a decrease in the purchased asset quotation.
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Bonds – a category of government or corporate securities in which the investor transfers funds to the issuer (the organization that issued it) on the term that the borrower will return the loan by a certain date and pay a certain fee for the use of borrowed funds. Investments in bonds belong to the conservative methods, the yield from them is relatively small, but the risk of non-return is minimal.
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Mutual funds are one of the most common formats of collective investments. In this method, a management company (an institutional investor) combines the deposits of private investors, selects promising assets, and invests funds to make a profit. The income is distributed among the participants according to the size of their shares. This way of investing doesn’t require special training, as funds are managed by a fund headed by an experienced manager. The average rate of return of a mutual fund exceeds that of bank deposits.
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Investing in gold and precious metals. Gold is considered a defensive asset; investments in buying this precious metal are not very profitable. At the same time, gold is one of the most liquid tools since it can be sold at any time, and proceeds to acquire a more profitable position. Investments in gold may be aimed at purchasing metal bars or coins, ETFs, CFD contracts, futures, or shares of gold mining companies.
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Investments in the purchase of foreign currencies. This type of investment can be divided into two categories — the purchase of real currency or earning on the differences in quotations of currency pairs in the Forex market. In the first case, go to a bank or exchange office and buy foreign currency for local currency at the current rate. Keep the currency at home, in a safe-deposit box, or in a foreign exchange account. If you want to earn on currency exchange rate differences on the Forex market, open an account with a brokerage company and make transactions by buying/selling currencies in the trading terminal. In the Forex, market quotes change rapidly and after a certain period the purchased asset can be sold at a higher price and profit can be recorded. The disadvantages of this method are that the high volatility (changes in exchange rates) can be a source of both profit and loss. For a stable growth of the deposit, you need to learn to analyze the market situation.
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Investing in cryptocurrencies. Cryptocurrencies are among the most profitable and risky investment assets. There are thousands of cryptocurrencies quoted in the markets right now, with values ranging from a few cents to tens of thousands of dollars per unit. Investing in cryptocurrency can accelerate capital gains, but you need to take steps to limit risk.
Main types of investment strategies
There are two main styles in today's investing — active and passive.
An active investor constantly acquires new assets, reinvests profits, and monitors the condition of the investment portfolio. To increase profits using this strategy, more risky instruments must be purchased such as shares of little-known companies, cryptocurrencies, or stock indices. This position requires deep knowledge of how stock and financial markets work, significant experience, and readiness to risk one's savings.
A passive or conservative style is characterized by long-term investments with minimal risk and moderate returns. Conservative investors invest in the purchase of government or corporate bonds, shares of large companies with dividend payments, or shares in mutual funds. This style is usually followed by novice investors who have little experience and knowledge in investing. Having mastered the methods of searching for promising assets and methods of capital management, investors can add more risky assets to their portfolios, which can bring higher income in the long run.
Well-known brokerage companies offer owners of trading accounts to get income without their own participation in trading. To do this, you can use the method of copying trades. With this method, you analyze the results of traders registered on the platform, subscribe to them, and then the system begins to automatically copy their transactions, increasing the amount in your account. If you want, you can change a trader or copy transactions of several participants, if the size of the deposit allows.
Another option for gaining passive income from trading on the foreign exchange market is to open a PAMM account and deposit your funds into it. In this case, your funds will be managed by an experienced trader with stable growth rates of the trading deposit. The broker company publishes a rating of managers, where all information is displayed such as profitability from transactions, % growth of the capital, the number of accounts under management, etc. The trader gets a part of the profit from trading as a reward.
You can combine active and passive styles in your strategy. For example, to invest in the purchase of shares, buy a share in a mutual fund and register with a PAMM account or master the method of making money by copying trades.
Types of investments by term
All types of investments can be divided into three categories depending on the time frame between the acquisition of a financial asset and the taking of a profit. In terms of maturity, there are three categories of all types of investments:
Short-term. Here, the instruments are purchased for a period of one day to one year;
Medium-term. In this case, the duration of possession of the asset varies from one to three years;
Long-term. This method requires a package of different instruments to be formed and promising assets are held for three years or longer.
In short-term strategies, an investor acquires riskier assets with potentially high returns. These may include income from transactions in the Forex market, the purchase of cryptocurrencies, some shares, shares in mutual funds, or real estate funds, etc. You must periodically add funds to your investment account, as well as keep track of market terms, timely fix profits in transactions, and sell assets that do not generate income to get income with a short-term investing strategy.
For beginner investors, a promising direction for short-term investments can become earnings from copying transactions or registration with a PAMM account and transfer of funds into trust management by experienced traders.
In a medium-term strategy, funds can be invested in various instruments such as corporate bonds, ETFs, shares of foreign and American companies, including for dividends, etc. Part of the money can be stored in bank deposits, and a certain part of the capital is used to purchase riskier assets, such as cryptocurrencies.
Long-term strategies are not designed for quick profits, but the gradual growth of capital using compound interest mechanics. The most common instruments for long-term investments are government and corporate bonds, stocks, and ETF funds. Over time, the amount in your account grows not only by increasing the value of your current assets but also by receiving dividends and coupon income from the purchase of bonds. Some of the money may be held in long-term bank deposits. Also, with this strategy, 10-20% of capital is invested in riskier instruments. When the situation in the markets is difficult, part of the capital can be used to buy protective assets such as gold, government bonds with guaranteed coupon profit, or shares of solid companies with dividend payouts, and others.
With any strategy, you shall periodically monitor your portfolio - get rid of unprofitable assets, timely fix profits, buy promising instruments at the time of drawdown, invest profits from dividend and coupon payments in the purchase of new instruments.
Main types of investments by risk
Before buying any investment instrument, you should consider not only the degree of its profitability but also the potential level of risk. You should remember that any investment is associated with risk since you may lose some of your funds as a result of wrong actions or a change in the market situation. More reliable instruments usually don’t give high returns.
Low-risk assets. These include bank deposits where the return of deposits is guaranteed by the government. Owners of government bonds (federal loan bonds) are also minimally risky, but the longer the maturity of these securities, the higher the percentage of coupon income. A widespread protective asset is a bar of gold, in which funds are invested during periods of political instability and crisis in the markets.
Medium-risk instruments are stocks, corporate bonds, ETFs, and mutual funds. Investments in shares of large companies are considered less risky, but there may be losses as a result of a decline in asset quotations on stock exchanges. Among real investments, investments in the purchase of apartments in new buildings belong to this category. If the house is successfully commissioned, you can significantly increase the amount invested in one or two years, but there is always the risk of the developer's bankruptcy or the freezing of the object.
High-risk assets are cryptocurrencies, earnings on the Forex market, buying shares of startup companies, and investing in the development of innovative technologies. With a high level of risk, these instruments can provide high returns in the short term.
Experts recommend combining instruments with different risk levels in your investment portfolio for stable deposit growth. Even if the value of one or two instruments decreases, the losses are compensated by an increase in the price of other instruments.
Main types of investments by profit
Any type of investment is evaluated by two key factors, which are risk and return. The higher the potential yield, the greater the risk of losing money invested in the purchase of an asset.
There are several categories of all assets according to their degree of profitability:
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Unprofitable. These investments don’t provide a direct financial benefit but are focused to pay off in intangible terms. Well-known companies invest millions of dollars in advertising to increase brand awareness and build customer loyalty. These costs are offset by future sales growth and increased customer interaction time (LTV) when a customer makes repeat purchases and recommends the company to his or her community;
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Low-yielding. This category includes assets with minimal risks, such as bank deposits and government bonds, as well as investments in gold and other precious metals;
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Medium-yielding. These include ETFs, shares of mutual funds, real estate funds, corporate bonds, stocks of American companies;
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High-yielding. These include the buying of foreign currency in the Forex market, cryptocurrencies, stock indices, or derivatives (futures, options). Such assets can generate high income, but their value fluctuates considerably and can quickly lose value when the market is highly volatile.
What kind of investments are suitable for a novice trader?
You can start investing even with a small starting capital and gradually add new assets to your portfolio. To start investing, choose a reliable brokerage company and register a trading account.
Depending on your strategy, you can choose the following tools for investment:
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Government or corporate bonds - low-risk assets, the coupon payments per year ranging from 3 to 9%, depending on the duration of the loan;
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Shares of domestic and foreign companies. Here you can earn on the growth in the value of the asset, as well as get income from dividend payments;
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Shares in mutual funds, pension funds, investment funds, and ETFs. You can become a member of an institutional investor organization. Experienced managers select promising instruments for investment, and each shareholder gets payments based on the size of his share.
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For high-yield investments, you can register a PAMM account and transfer funds into trust management or use the function of copying transactions of successful traders at large brokerage sites.
Top 5 tips for beginner investors
Investing isn’t an easy but fascinating process that allows you to create good capital in a few years, get a passive income and forget about going to the office.
The experts at the Traders Union have developed several recommendations on how novice investors can start investing, reduce the risk of losing money and achieve stable capital growth.
Define the purpose of the investment
This is a key action that determines the choice of an investment strategy and the right instruments in which to invest. Ask yourself questions such as what do you want to achieve? Do you want to save for a large purchase, save to pay for your children's higher education, or perhaps provide yourself with a personal pension? Or do you want to build a system of passive income and live on the interest? Calculate how much you plan to save each term. Write down your answers in a table format. Keeping records of income and expenses is an obvious solution that is rarely used in practice. After only a month of keeping total records of your money, you'll find the "black holes" where your money goes, such as unscheduled purchases, cab rides, dinners at catering establishments, subscriptions to unnecessary services, etc. By adjusting your budget, you can easily allocate 15-20% of your monthly income to build investment capital.
Close loans and get rid of debt
Loan payments "eat up" a huge part of the family budget. If you can, cut all expenses and pay off your loans as soon as possible. When you have long-term credit obligations (mortgages, etc.), calculate how much money goes to repay debts and how much you can allocate for investment purposes. Remember that you can only invest free money, which is the money that remains after you pay your obligatory bills and pay your current expenses. Otherwise, you'll have to "pull" money out of your capital, which will negate all of your capital-building efforts.
Develop your investment strategy
To do this, determine the amount of start-up capital and the number of monthly investments. Estimate the period for reaching your final financial goal from step 1. You can use a credit calculator on one of the investment websites. Set long-term investment goals, and once a year set goals for capital growth in the next 12 months. Once a month, review your assets, close unprofitable trades, and buy new assets. Redirect any dividend or coupon payments you receive back into buying financial instruments. Due to the compound interest, your capital will begin to increase after a few months of active operations, and over time, the deposit will grow exponentially.
Diversify your portfolio to reduce risk
Purchase assets with varying levels of return and risk. Approximately 30% of capital should be invested in protective instruments with guaranteed income, 40-45% can be invested in the purchase of stocks, ETFs, or shares in mutual funds. High-risk instruments should not exceed 15-20% of your capital. Replenish your investment account monthly and buy new assets. Also, reinvest coupon profits and dividend income. In this case, even a decrease in the value of one or more assets is compensated by profits from other investments, and capital will grow in all market situations.
Master your investing skills
To get a stable profit in the long run, you will have to master market analysis methods and learn basic concepts and terms, read reviews, keep track of analytics, and constantly look for promising areas for investing funds. To start, the Traders Union recommends taking a free financial literacy course and mastering the methods of family budgeting and accounting of income and expenses in everyday life. Join investment groups in social networks and Telegram channels, immerse yourself in investment topics, attend webinars and masterclasses by experts in the financial industry.
Top 5 mistakes of novice investors
Newcomers to investing often make mistakes that diminish the profits from their investments. The most popular mistakes of novice traders that slow down the growth of the deposit and reduce income are analyzed below.
Use only available funds for capital formation that you can afford to lose and still survive. Keep records of your income and expenses, allocate 10-20% of your monthly income for investment purposes. Create a financial safety cushion in advance in the form of currency reserves and a separate bank account for unforeseen expenses. Don’t use credit funds to purchase investment instruments, and remember your long-term financial goals. Only systematic actions can achieve your desired results.
A popular mistake made by novice traders is to act chaotically and make trades "at random," without first analyzing the market. Get basic training in financial literacy and the basics of investing. There are many free financial literacy courses available on the internet now. You will learn how to keep track of your funds, make an individual financial plan, reduce unnecessary expenses, and get a basic understanding of investment tools and techniques.
Be patient and don't let your emotions run away. The price of financial assets changes every day, and quotes can go up as well as down. Do not rush to sell stocks and other instruments if they go down in price. Perhaps in a few days, the situation will change and their value will rise.
Don't trust promises of fast and guaranteed profits, if you are offered to invest in a project with a guaranteed return of 100% per month, refrain from such purchases because they are almost always scams. Many investors in the pursuit of quick profits have invested in various pyramid schemes and ended up losing money!
Take into account the cost of brokerage commissions and tax deductions. Any brokerage company charges its clients a commission for making transactions and withdrawing funds to bank cards or e-wallets. Also, remember that investment income must be declared and taxed to avoid conflicts with the law.
Best brokers for investments
An important prerequisite for a stable investment income is the right choice of a brokerage company. Here we look at the three most promising brokerage platforms for first-time investors.
RoboForex is the best broker for stocks and copy trading
RoboForex was registered in 2009 and is regulated by the international financial regulator FSC Belize and the European commission CySEC. The platform unites over 3.5 million users from 169 countries and millions of financial transactions are performed here daily. RoboForex offers its clients a wide range of trading instruments such as 36 currency pairs, stocks of leading companies, stock indices, ETFs, commodity contracts, metals, etc. Transactions can be made in the desktop version of the MetaTrader trading terminal or via a mobile application. The RoboForex platform has options for gaining passive income, such as a trades copying service, an affiliate program, and a multilevel bonus program for each user.
Working conditions:
Minimum deposit is $10
Currencies in use are USD, EUR, GOLD;
Leverage is up to 1:2,000
Technical support is available twenty-four/seven.
The floating spreads are from 0 pips;
InstaForex is the best broker for active and passive investment
InstaForex International Company has been among the leading international brokers providing trading services since 2007. Today over 7 million trading accounts are registered on the platform. The InstaForex broker provides clients with access to trading over 300 investment assets.
The company has a license for services in the field of financial markets from the international regulating body FSC. Traders without experience can get income from copy-trading and transfer funds for management on PAMM accounts. The following assets are available to users: currencies, stocks, options, indices, futures, cryptocurrencies, and other financial instruments. There is a bonus program for clients that provides access to current analytics, and contests among traders are held regularly.
Working conditions:
The Minimum deposit is $1
Over 300 trading instruments.
Withdrawal currencies are EUR, USD.
The leverage is from 1:1 to 1:1,000.
Technical support is available twenty-four/seven.
There are services for copying trades and PAMM accounts for passive income from trading;
There are cent accounts for novice traders.
Binance is an exchange for cryptocurrency investors
Binance service is among the largest international cryptocurrency trading platforms. The Binance exchange is the leader in terms of daily turnover, the number of active users, attendance, and liquidity of financial assets. The cryptocurrency exchange also has its payment unit, which can be used for internal payments with the service. Trading is conducted through a mobile application, and users have access to a wide selection of cryptocurrency assets for trading.
Working conditions:
The minimum deposit is $1.
The spread is market-based and depends on the selected asset;
Withdrawal currencies are EUR, USD.
Leverage is 1:10
Safe storage of cryptocurrency is held in a "cold" wallet.
Summary
In the previous sections, different ways to invest were reviewed and you were instructed on how you can start investing from scratch. Also, the conditions of the three leading brokerage platforms were compared. Investing is available to everyone, but to form capital, you need to define a financial goal, develop a trading strategy and follow it to the planned result. This website offers a wealth of resources for novice traders, including reviews, market analysis, real user reviews of brokerage platforms, and much more. Start today and move towards your financial well-being together with the Traders Union!
FAQs
How much should I invest when starting out?
According to experts, it is possible to start creating investment capital with $125 to $250 subject to monthly replenishment of the deposit and reinvestment of interest. But here everything depends on your financial goal and investment strategy.
How to find funds for investment?
In the beginning, the Traders Union recommends keeping an accurate record of your income and expenses for at least a month. By examining your expenses, you will be able to find non-targeted expenses that can be reduced without changing your lifestyle. You should allocate about 10-15% of your monthly income for regular deposit replenishment.
What is compound interest and how does it affect capital growth?
The compound interest methodology is that you invest the income you get from investing in the purchase of new assets. Over time, the amount in the account grows, dividend and coupon payments increase, and all these funds are used to buy new instruments or expand the position on current assets. The compound interest method works great for long-term investments. And the larger the investment portfolio and the longer the investment term, the higher the rate of growth.
Can I make money on currency fluctuations without trading myself?
Leading brokerage companies allow users to get passive income from trading. For this purpose, you can use the copying trades service or register a PAMM account and transfer funds to the trust management of experienced traders for a percentage of profit.
Glossary for novice traders
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1
Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
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Investor
An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.
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3
Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
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Cryptocurrency
Cryptocurrency is a type of digital or virtual currency that relies on cryptography for security. Unlike traditional currencies issued by governments (fiat currencies), cryptocurrencies operate on decentralized networks, typically based on blockchain technology.
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Yield
Yield refers to the earnings or income derived from an investment. It mirrors the returns generated by owning assets such as stocks, bonds, or other financial instruments.
Team that worked on the article
Mikhail Vnuchkov joined Traders Union as an author in 2020. He began his professional career as a journalist-observer at a small online financial publication, where he covered global economic events and discussed their impact on the segment of financial investment, including investor income. With five years of experience in finance, Mikhail joined Traders Union team, where he is in charge of forming the pool of latest news for traders, who trade stocks, cryptocurrencies, Forex instruments and fixed income.
Olga Shendetskaya has been a part of the Traders Union team as an author, editor and proofreader since 2017. Since 2020, Shendetskaya has been the assistant chief editor of the website of Traders Union, an international association of traders. She has over 10 years of experience of working with economic and financial texts. In the period of 2017-2020, Olga has worked as a journalist and editor of laftNews news agency, economic and financial news sections. At the moment, Olga is a part of the team of top industry experts involved in creation of educational articles in finance and investment, overseeing their writing and publication on the Traders Union website.