For a beginner, investing may seem complex, but it is based on a simple principle: you buy an asset expecting it to appreciate, thus giving you an income or the chance to sell it for a profit. There are many investment options available. The one you choose will depend on the return you expect to make, the time within which you want to make this return, how much risk you can stomach, and the level of liquidity you need. With that in mind, let us explore some common investment options:
Fixed Income Securities
Fixed income securities are used by governments and other entities to raise capital to finance their projects. They borrow money from investors, and in return, repay with interest within specified timeframes. Examples include bonds, treasury bills, preferred stock, etc. They are considered very low risk because they are guaranteed by governments and other institutions considered too large to fail. However, they also have a low return on investment. Fixed income securities are good additions to a portfolio since they offer diversification and lower risk.
Investing in equities involves buying shares in a company while expecting they will create value through capital gains, and/or generate capital dividends. If an equity investment’s value increases, the investor benefits from the difference if he/she sells the shares. Alternatively, the investor may decide to hold the shares for a longer period of time and instead earn a dividend when the profits earned by the company are distributed amongst its shareholders.
While they can be volatile and therefore be perceived as a higher risk investment, investing in equities also offers liquidity and is ideal for both long- and short-term investors.
Private equity investments involve capital that is not listed in a public exchange. Typically, funds or individuals invest directly in a private company or outright buy out public ones, resulting in their delisting. Investors earn dividends as well as achieve capital appreciation. Meanwhile, the company uses the funds raised from investors to expand, acquire new technology or simply solidify its balance sheet. While private equity offers relatively stable returns without bearing high risk, it comes with low liquidity and is too expensive for most individual investors.
Mutual funds allow investors to pool their resources and access stocks, bonds or other assets that would otherwise be inaccessible. They are usually overseen by a fund manager. Such funds offer investors capital appreciation, and interest income. Since they are handled by a professional, risk is managed. They are ideal for both long- and short-term investors.
This broadly involves any investment in property with the expectation of a return. Investors can benefit in many ways, including earning a rental income, capital appreciation, the ability to hedge against inflation, and the promise of long term financial security. On the other hand, real estate can be very illiquid and thus inappropriate for short-term investors.
A derivative is a security whose value is determined by an underlying asset. The derivative itself is an agreement between two or more parties, and it derives its price from movements in the underlying asset. Some common underlying assets include stocks, bonds, commodities and market indices. Derivatives offer capital appreciation, relative stability and some liquidity.
These are investment funds, which pool the funds of like-minded investors to achieve the investment objective, which is usually to provide capital growth, preservation, or both. They are overseen by a fund manager whose job is to find opportunities for the fund to meet its objectives. They are able to access a wide range of assets and asset classes , allowing them to spread risk while still earning high returns. They are also easy to liquidate if need be. On the flip side, many specialised funds are preserved for sophisticated investors, locking out other potential beneficiaries.
In conclusion, there is no wrong or right investment option. The product you invest in should match your investor profile as well as your objectives. Contact firstname.lastname@example.org to speak to a financial advisor about building your investment portfolio.