Investing Basics: Concepts And Investments Options

Part 1 of 5 of Investing Basics

The concept of investing

Regardless of the fact that you are an employee or employer, the concept of putting in time for money should no longer be a new idea. The exchange that occurs is the financial compensation of labour for money, so one has to work harder or longer to increase so-called compensation. The scalability of the process is unfortunately limited to the number of hours an individual has in a day.

Why is there a need to invest?

By investing, you basically using the extension or multiplication of yourself, by putting your money to work through the effort of others. So instead of putting in efforts yourself, you utilise the efforts of others to achieve financial returns.

Read about: Effects of compounding returns

What can you invest in?

Depending on how much time and effort you wish to put in, the investment options available offer different amount of risk and return. As there is no ‘one size fits all’ allocation, individuals profile and risk appetite determines the expected risks and potential returns available at the end of the day.

Commonly regulated investments available in Singapore

Bonds

Bonds are a form of debt securities issued by borrowers to raise capital from the financial markets. The borrowers may be governments or companies and a steady stream of yield is usually provided at intervals until maturity of the bond. This yield is also known as a ‘coupon’ and the coupon rate is expressed as a percentage of its ‘face’ or ‘par’ value. The ‘creditors’ which are the investors will be paid 100% of the ‘face’ or ‘par’ value upon maturity.
The credit worthiness or rating of the issuing government or company is an indication of its ability to repay its obligation upon maturity. A borrower with lower credit worthiness will have to offer higher coupon rate to attract lenders, while a borrower such as the Singapore Government with its high credit rating will offer lower coupon rate.

Effort required: Minimal

Returns: Low

Risk: Low (Government bonds), Average (Investment graded), High (Junk)

Stocks

A company can raise capital from investors in the financial market by issuing shares of its company. As a holder of the company stock (shareholder), you are basically owning a part of the company and will be entitled to an equal portion of its assets and profit, based on the percentage of shares you hold.

Shareholder earns income based on owned shares when the company chooses to declare the dividend. The shareholder may also sell the shares back to the open market and make a profit or loss based on the valuation of the company at the point of selling.

Effort required: Average to High

Return: Average to High

Risk: Higher

Unit Trust Funds

A Unit Trust fund pools money from investors and invests according to its stated investment objective and investment approach. The fund may invest solely or into a mixture of Bonds, Stocks, Commodities, Real Estate and/or other invest-able assets. The minimum and maximum allowed allocation of each asset class will be clearly set by the individual Unit Trust fund.

Investors or holders of the Unit Trust receive units in the fund invested. A dividend may or may not be distributed depending on the Unit Trust fund nature and objective. Units owned may be sold back to the open market and investor receive a profit or loss based on the valuation of the units at the point of sales.

Effort required: Lower to Average

Return: Average to High

Risk: Low to High (Dependent on nature of the fund)

Trading Options

Not exactly consider as investing, Trading options allow the investors to speculate in future movement of instruments such as CFDs, Forex, Binary, and ETFs, without owning the underlying assets. Trading options are heavily leveraged and offer the potential for exceedingly high payout.

Predicting the correct movement and executing the trading will allow profit to be realised. In the event of ‘margin call’, the investor will be expected to top up an additional fund into the account. Losses may exceed initial or expected investment amount based on the price movement of the underlying assets.

Effort required: High

Return: High to Very High

Risk: Extremely High

No matter what financial instrument you choose to invest in, understand that only with proper diversification will your investment portfolio be able to weather market volatility and uncertainties.

Read aboutInvestment Portfolio

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