here, we'll break down the different types of investments that are available and discuss everything to do with risk and reward.
when it comes to investing, it can often be a daunting task to even think about where to put your money. there are so many options out there and quite often, you can be mislead.
here i will break down each type of investment and help you understand what to look for when investing.
investments are usually broken down into the following asset classes:
what are equities?
an equity (stocks and shares) is ownership of a company that is publicly traded and listed on an exchange. each share in a company represents part ownership of that company. the day-to-day price of an equity depends on how it is traded on the market. if more people are buying the equity than are selling it, the price will go up. if more people are selling it, then the price will go down.
ultimately, share prices come down to supply and demand. if certain companies are in very popular (as we have seen with tech companies recently) their share price could increase drastically.
the level of risk for equities can vary, but overall as an asset class, they are usually deemed as medium to high risk assets.
what are bonds?
a bond, or a fixed income product, is issued by a corporation in order to raise finance for the business. The term is usually applied to longer-term instruments, with maturity of at least one year.
the company gets the cash it needs and in return the investor is paid a pre-established number of interest payments. when the bond expires, or "reaches maturity," the payments cease and the original investment is returned.
each corporate bond will have it's own credit rating, as issued by a number of credit rating agencies. the credit rating usually determines the amount of interest the investor will receive from the bond. for example, a bond with a very high credit rating will offer lower interest payments than a bond with a low credit rating.
again, the level of risk for bonds can vary, but in general they are viewed as low risk assets.
investing in property has long been the preferred choice of investments for the vast majority of the population. this is because it is drummed in from an early age that we need to get onto the property ladder as soon as we can.
but why is property so popular?
the main reason we all love property is firstly because it is an asset that we can use. there are not many investments that you can live in, bring up a family in and renovate to your liking.
beyond the emotional side of property, what are the benefits?
the biggest benefit of purchasing a property is leverage. this means that you have the ability to own an asset, without paying the full price. many first time buyers are being offered attractive mortgage rates on as little as a 5% deposit.
this means for example, that you can own an asset worth £500,000 by only putting down £25,000 from the outset. if you were to own £500,000 worth of shares, you would have to invest the full £500,000.
if that property then increases in value, say by 5% the following year, you have already made a 100% return on your initial investment (not taking into consideration interest payments & costs etc).
beyond your main residence, you can also invest into a rental property. this way, you also get rental income from the investment, as well as any capital growth.
property is usually classed as a low risk investment.
what are commodities
commodities can come in all shapes and sizes, but ultimately they are a tangible goods.
examples of commodities include gold, silver, oil, soya beans, rice, coffee beans etc (the list could go on and on).
the prices of commodities, as with all investments, comes down to supply and demand. if there is a higher demand for the commodity than is being supplied, the price will increase. likewise, if there is an oversupply, compared to the demand, the price will decrease.
you can invest into commodities in various ways, such as holding the physical asset (gold bars) but the most popular way these days is to invest into an exchange traded fund that tracks the price of the underlying asset.
the risk level of commodities can vary greatly.
what are alternative investments?
alternative investments can come in all sorts of shapes and sizes. the definition of an alternative is an investment other than equities, bonds, property or cash. so pretty much anything other than those assets can be classed as an alternative.
alternative investments are rarely regulated so you often have to side with caution when considering them as an investment.
alternative investments can include:
alternative investments often have low correlation to standard asset classes so are often used as a diversification tool amongst investors that already have equities, bonds and property.
again, the risk level of alternative investments can differ but they are usually classed as a high risk investment and therefore should be treated with caution.