Extreme Measures

On the surface, things may look pretty much the same on the street where you live. But take a closer look. Neighbor Bob now rushes home to day trade his burgeoning stock portfolio. That nice old Mr. Phillips on the next block? Haven't seen him much lately? He's holed up trading foreign currencies-having fun and making a good buck, too. The busy soccer mom across the way? She trades stock options for two hours every day after she puts her kids on the school bus in the morning. And she's turned a $5,000 savings account into a $35,000 war chest in just five months.

These ordinary, extraordinary people have stepped up the pace, broadened horizons and made success and adventure a new hobby. While many continue to plow discretionary income into old standbys like savings accounts, insurance policies, conventional bonds and traditional real estate, others roam worldwide and cybersearch new continents seeking brand-new investment niches and opportunities.

They are a new breed. All of them are Extreme Investors in their own right. Are you willing to risk a little more in making a jump to the next level of your financial freedom? Do you want to make ordinary, mundane investment routines an exhilarating and lucrative hobby? Should you become an Extreme Investor in your own right? Maybe.

Determine Your Investment Potential

To succeed at extreme investing, you must have a burning desire to master the rules and strategies of the game. This is essential if you want to develop a trading system or skill set that will work for you in the pursuit of extreme investing. Extreme investing demands significant discipline-which means you must possess Zen-like control while trading and adhere to strict risk-management techniques. But the first step is to determine whether your financial situation allows for this extreme adventure.

To be an extreme investor, you need extra capital-money you can live without comfortably, both in terms of continuing lifestyle and peace of mind. This strictly excludes retirement money or the kids' college funds! Many investors start with money that's simply idle, not already earmarked for a specific purpose. Some investors divide their existing stock account into two separate accounts: one for long-term investing, the other for playing options and day trading.

The point is that money used for extreme investing must be extra money, not money you need to live on, and not money you are diverting from other vital accounts. If you have the slightest doubt about whether your financial status will allow for any extreme activity, you need to produce an overall financial plan-a snapshot, if you will, of your financial status-for you and your family:

• Look at your net worth. Take into consideration how long it took you to get where you are and how far you are from achieving your retirement goals. What must your net worth be for you to feel secure in retirement? What's the difference between your net worth and the cost of your future plans?

• Consider your current income and expense picture. If you pursue extreme investing at any level, will your current income source be affected?

• If you have extra money, should that money be safely invested for future expenses that you've identified in your financial plan? If you have extra capital but pending expenses, don't risk that capital on extreme investing.

If you still have doubts about whether you have the extra cash to go to the extreme, talk to a financial consultant. He or she will take a look at your net worth, your plans for the future and other variables, and help you figure out what's left to play with at the end of the day.

Getting Started

There are several forms of extreme investing you can explore, and each requires a different level of capital to get started. Extreme investing in IPOs, for example, requires more time but less capital than other forms of extreme investing. Your time will be spent researching your prospect and strategizing your timing. These days, you can invest as little as a few thousand dollars in an IPO and make a small fortune in a month-or you can lose it all in a day. Naturally, the more you put at risk, the greater your potential reward.

Trading options also requires little start-up capital. You can buy an option for a few hundred dollars and turn that into a few thousand within days or weeks, but the risk of losing every dollar you spent on that option is significantly greater than in other investment scenarios. That's because, unlike owning stock in a company, stock options can expire worthless.

Whether you hope to pursue extreme investing two hours per day or 24/7, you need to treat this endeavor as a business. In fact, you need to think of yourself as a start-up, with a plan and seed capital and all the ifs and maybes and trial and error that characterize every start-up. This means that you may need to factor in a period of loss at the start. Allow for a sufficient start-up period and enough money to support yourself until you're generating income.

Investing Tools

Aside from investment capital, extreme investing may call for additional operating expenses. And remember, this is a business, so you need to have a business plan that projects your expenses. It's likely you have some or all of these already, but the following is a list of some of the expenses you can anticipate:

• computer system
• Internet hookup and monthly fees
• trade books and periodicals to learn the trade
• data feed and software for market information
• monthly fees for your data hookup

Expect to pay $150 per month for services and necessary research support sources. In any case, you will need to be online with a computer that doesn't make you tear your hair out because it's so slow. If you have an older Macintosh or a 486 PC, take it straight to your nearest charitable organization and be prepared to get new stuff (cha-ching!-that can run another $3,000 or more).

Trading stock options, trading in junk bonds and getting involved in IPOs require a slightly less fancy computer setup than does day trading. You don't need rocket execution speed, but you may want a bigger screen to play with graphs. No matter where your extreme investing takes you, though, you do have to spend money to get up to speed. Books, newsletters, seminars and other educational opportunities are available for free or for a fee; most are available over the Internet.

At this point, you don't have all the information you'll need to begin extreme investing, but you have a rough idea of the costs involved in getting set up for this venture.

Amount of Time Dedicate to Investing

When you start any form of extreme investing, your natural inclination will be to play the game to make lots of money right away. This is a mistake. Instead, your immediate goal should be to learn how it all works. If you take things gradually, you can learn the required lessons without blowing your investment capital. But this means you must be willing to forego actually making money for a while, and instead spend time making smaller investments and maybe even learning the art of taking a loss. It's all part of your education. The real investment is your time, and you must allocate lots of it to learning. You can keep your tuition costs down by being patient and sticking with tiny investments until you get the hang of it.

Aside from the amount of time you'll need to spend each day pursuing your chosen form of extreme investing, you'll need to spend time getting up to speed-and staying there. One of the most time-consuming elements of getting started involves sifting through all the products and services available and determining the requirements for your particular investment environment. For day trading, you'll need to choose a broker and an appropriate trading platform. Sometimes they come as a package, but you'll need to know enough about day trading to discern which ones have the speed in executing orders you need for your own unique style of trading.

Other forms of extreme investing require less setup time, and your current broker and trading platform may be quite suitable for the type of extreme investing you have in mind. While cumbersome and inefficient for day trading, most brokers offer what's required to invest in IPOs and stock options. Most of them offer plenty of trading tools to get started. If you don't have a broker or a trading firm, and you choose to get involved in IPOs or options-or some form of stock trading-you'll need to interview some brokerage firms. Speak with their customer service people to see whether they're available when you need them and to determine whether you think they're knowledgeable and pleasant to deal with. You'll need to investigate issues that involve data integrity and stability (you may have heard about some of the online brokers having servers crash, leaving traders hanging for hours).

The point is, there's a lot to learn in terms of setting up the game board and figuring out the playing field. Once you've done that, then you have to learn the game-how your chosen market works. The learning curve for any form of extreme investing is slower if you work at it part time. Part-time investors will be better off paper trading for a few months and may want to veer toward longer-term and less hectic forms of in-vesting that are more suitable for part-time involvement-although holding stocks for days, weeks or maybe longer can be an intense experience, too. If you decide to pursue extreme investing on a part-time basis, you'll still need the same tools of the trade as if you were involved full time.

Trading Style

Most forms of extreme investing revolve around some form of trading, which means identifying an investment vehicle that's about to move in a certain direction, taking a position (buying it), waiting for the move to reach a target price, and then closing out your position at a profit. The rules are similar for all trading, but the pace and strategy depends on your trading style.

Many extreme investors buy and then sell within the same day (they often liquidate all their positions by the market close). This represents the most intense form of extreme investing and is not a good idea if you intend to do your investing on a part-time basis. When trading on a part-time basis, odds are, the distinct advantage goes to the more experienced trader in the deal. This is true even if the part-time trader owns the best and fastest trading tools and execution systems available. These fast-paced trading styles work best with full-time participation because they require rapid decision-making and equally rapid execution speed that can be mastered only with lots of experience.

Slower-paced trading methodologies are more forgiving for those just learning about extreme investing. The extended time horizon allows investors to more casually react to market changes or other factors that might indicate the wisdom of reversing a position. With a longer time horizon, you enter an investment with a plan to stick with it until your target price is reached or until the conditions upon which you entered the trade change-and the faster the pace, the less forgiving.

Do Your Research

All the research, hands-on practice and learning curve stuff we've talked about so far boils down to lots of homework: homework before you get started, and homework every single day once you're on the investing highway.

The bottom line is that there's no preset formula that can tell you how much money you need to bring to the table, how much time you need to devote to trading each day, or what it takes to succeed at a particular style of extreme investing. The key to your enjoying-and profiting from-any form of extreme investing will come from your love of the sport and your willingness to do what it takes to master it.

This excerpt was reprinted from Extreme Investor: Intelligent Information From the Edge (Entrepreneur Press) by Randy Rodman with Don Logay.

Randy Rodman is an avid day trader and professional writer on marketing, business, the Internet and investing. Don Logay is a business and corporate communications contributing writer to hundreds of magazines and newspapers.