A beginner's guide to the types of financial assets

 

A beginner's guide to introducing the types of financial assets

Written by Tao Elyaalo

The investment climate can be dynamic and constantly evolving, but for those who devote sufficient time to understand the fundamentals of investment principles and the various forms of assets, it is something that makes them reap big profits in the long term. The first step is: Learn how to distinguish between the different types of investments, and what distinguishes each of them on the "risk ladder".

But before we start, there are some important points you should know:

It is difficult for beginners to carry out investment operations; Because there is a huge range of potential assets that they could add to their portfolio.

The investment risk ladder that defines classes (types) of assets based on their relative risk ranks cash liquidity on the basis that it is the most stable investment, and alternative investments are often the most volatile.

Often the resort to commodity index funds or exchange-traded funds that reflect the state of the market; It is the best way for newbies to invest.

First: Understanding the "ladder of risks" of investment:

The following are the major asset classes, in ascending order of risks - from lowest to highest - on the investment risk ladder.

 

1. Cash:

Cash bank deposits are the simplest, safest, and easiest-to-understand investment asset. Not only does it provide investors with an accurate knowledge of how much interest they will receive, but it also ensures that their capital is repaid. On the other hand, however, the interest earned on cash deposited in "savings accounts" rarely exceeds inflation rates.

 

Also, CDs are highly liquid instruments, which are very similar to cash. They are instruments that usually provide higher interest rates than savings accounts. However, the deposited funds are frozen for a predetermined period of time, with penalties imposed on early withdrawals of the money deposited in them.

 

2. Bonds:

Bonds are debt instruments that are slightly higher on the ladder of risk, with investors practically lending money to a company or agency (the issuer of those bonds), in exchange for periodic payments of interest, in addition to recovering the face amount of the bonds as soon as they are due. Bonds are issued by corporations, governments, many countries, and government agencies.

 

A typical corporate bond may have a face value of "$ 1,000" and taxable semi-annual interest. Interest on municipal bonds is exempt from government taxes, and it may or may not be tax-exempt for residents living in the country that issues these bonds. For example, taxes on US Treasury bonds and bills are imposed only at the federal level.

 

Bonds can be purchased on the basis of new offerings, or they can be purchased through secondary market offerings. The value of a bond can fluctuate depending on many factors, but it is mainly affected by the prevailing interest rates.

 

3. Stocks:

Shares allow investors to participate in a company's success through increases in the share price, and through dividends distributed to shareholders. Shareholders have the right to claim the assets of the company in the event of liquidation (i.e. the company’s bankruptcy), but they do not own the assets of the company under normal circumstances. While holders of common stock have the right to vote at shareholders' meetings, holders of preferred stock do not have that right; However, they have an advantage over the regular shareholders in terms of dividend payments.

4. Mutual Funds:

A mutual fund is a pooled investment vehicle managed by an investment manager that provides investors with a basket of stocks, bonds, or other investment tools, according to the fund’s prospectus.

 

Individuals can invest in mutual funds for as little as $ 1,000 a share, allowing them to diversify into up to 100 different shares within a particular portfolio.

 

Some mutual funds can track stock or bond market indices passively (in a passive way, that is, without the direct intervention of someone managing the portfolio business), such as the S&P 500 (S&P 500) or the Barclays Consolidated Bond Index. While other investment funds are actively managed: they are managed directly by the portfolio managers who choose the basic investments (the investments on which the fund was created). However, these funds usually have higher costs, which can be deducted from the returns of the investors.

 

Mutual funds can make dividends in the form of dividends, or in the form of interest and capital gains. And these distributions will be taxable if they are kept in a non-retirement account. Similar to individual stocks or bonds, selling a mutual fund can either result in a profit or a loss in the investment.

 

The value of investment funds is evaluated at the end of the trading day, and all buying and selling transactions (deals) are executed on the basis of that evaluation after the market (exchange) closes.

5. ETFs:

Exchange Traded Funds have become very popular since their launch in the mid-1990s. Tradable funds are similar to mutual funds; But it is traded on the stock exchange throughout the day, just like stocks on the stock exchange. And unlike mutual funds, which are evaluated at the end of each trading day, ETF values ​​change moment by moment throughout the day.

Many tradable funds track passive market indexes such as the Standard & Poor's 500 Index, the Barclays Aggregate Index, and the Russell 2000 Small Equity Index.

In recent years, actively managed ETFs have emerged, as have so-called smart beta funds, which create indicators based on factors such as quality, low volatility, and momentum.

6. Alternative Investments:

There is a vast world of alternative investments, including the following sectors:

6. 1. Real Estate:

Investors can own real estate by directly purchasing commercial or residential properties. But they can also and alternatively buy shares in Real Estate Investment Trusts (REITs), which raise the money of many investors to buy real estate.

 

Real estate investment funds trade like stocks. There are also mutual funds and negotiable funds that invest in real estate investment funds.

 

6. 2. Hedge funds and private equity funds:

Hedge funds - which may invest in a range of assets - tend to outperform traditional investment vehicles in turbulent markets. While private equity funds allow companies to raise capital, without being subject to a public offering. These investment tools, which are usually only available to accredited investors, often require high initial investments of $ 1 million or more. It also tends to place some conditions on net worth. In addition, both types of investments can freeze investors' funds for large periods of time (similar to CDs).

6. 3. Commodities:

Commodities refer to tangible resources; Such as gold, silver, and crude oil, as well as agricultural products.

Second: How to invest in a reasonable, appropriate and simple way:

Many seasoned investors diversify their portfolios using the asset types and types mentioned above, with a mix that reflects their risk appetite for investment. Investors are also strongly advised to start with simple investments, and then gradually expand their investment portfolios. Both mutual funds, or tradable funds specifically, are a good first step before moving to individual stocks, real estate, and other alternative investments

And with most people being very concerned about monitoring their investment portfolios on a daily basis, the resort to commodity index funds, which embody the state of the market; It is a workable, viable solution.

The bottom line:

Investment culture is essential, just as important as avoiding investments that you do not fully understand. So, rely on sound recommendations from experienced investors, while rejecting "confidential information" from unreliable sources. And if you want to consult a professional, look for freelance financial advisors who are paid only for their work, rather than those who take commissions. Above all, spread your assets across a wide range of assets.

 

Disclaimer: this article does not constitute a financial advice. It's only for information purpose.