Two factors must be given major consideration when dealing with any numismatic investment: grade and population. Grade refers to a coin's quality. The grading system for uncirculated coins (those that exhibit no wear) runs from MS (mint state) -60 up to MS-70 (a "perfect" coin), with investment-grade items beginning at MS-64. Very few, if any, coins are available with an MS-70 designation. Coins graded below MS-64 generally should not be purchased for investment purposes unless the item has a recognized rare date and mint mark. Many large marketing organizations in the field often peddle low-grade (MS-63 or less) coins as numismatic investments. But experienced professionals typically consider these items as common, and not worthy to be labeled as investments.

When purchasing rare coins, it's very important that they be graded and authenticated by one of the nationally accepted grading services, either the Numismatic Guaranty Corporation (NGC) or the Professional Coin Grading Service (PCGS). The coins should also be housed in hard plastic containers. This not only increases their liquidity but also helps to narrow the spread between their buy and sell prices.

The second factor, population, refers to the total number of coins given a specific grade by the grading services. When buying rare coins, check their population figure, or relative rarity, against other items in the sector or series (the set of years that a coin was minted with a specific design and denomination). Both grading services mentioned above publish population reports that provide this data. When choosing among coins, it's best to go with strong relative rarity (in other words, scarcity). This will typically pay off in the long run by increasing the likelihood that your purchase will benefit if there's a run-up in value for that particular series.

There are a few other advantages of coin investing that should be mentioned. For instance, there are no reporting requirements for the buying or selling coins, so your privacy can be easily maintained. Also, the tax code allows you to trade one numismatic item for another as a like-kind (or 1031) exchange, thus delaying capital gains taxes until you liquidate the investment. This allows you to build strong asset value by trading coins of appreciated sectors for those of other sectors that have remained dormant, with the hope that they will also rise in value. However, as is the case with all tax-related issues, be sure to consult your tax professional to ensure that your trades qualify for such a transaction.