Wednesday, October 18

Overview of Investment Products

Welcome to the second section of our "When and How to Invest" series. Today I would like to write a introductory piece on investment products.

In general, they can be divided into two categories:

  • Available to all: easily traded on the internet or a retail brokerage account
  • Available mostly to high net-worth individuals

1. Available to all

Cash and money market funds

  • Cash or CDs generate returns in terms of interest income. Money market funds, which comprise of high-quality, short-maturity debt instruments, give a yield similar to CDs but can be traded once a day. While they are the safest instruments, the return may not be high enough to compensate for inflation. >> more

Stocks / Equities

  • Owning a stock means owning a piece of a company. As an owner, you get the most benefit at good times, but take the most risk when bad. Statistically, this "high-risk-high-return" investment gives the best investment return on a long-term basis. >> more

Bonds / Fixed-income products

  • A bond is a loan made to the bonds' issuer (e.g. government or corporations) by an investor (e.g. an individual). In return, the investor receives regular interest payment (the rate is called the yield) until the bond is matured, at which point the issuer repays the principal.
  • At the same time, bonds can be traded in the market. Similar to stocks, bond prices go up and down depending on many factors, and this fluctuation affects the effective yield.
  • Therefore, although bonds give fixed, regular interest income, they are by no means a riskless financial instrument.

FOREX (foreign currency exchange)

  • Economies around the world use different types of currencies, creating the need to trade and exchange currencies.
  • When we buy a stock or bond from a foreign country, we are inherently buying into FOREX. For example, you live in US and own shares in a French company. If euro is strengthening against US dollar, even if the shares stay unchanged you are already better off with a foreign exchange gain.
  • For pure FOREX trading, I would recommend leaving it to the FOREX traders who have instant news on various markets. >> more

ETF (exchange traded funds)

  • ETF is a basket of securities that tracks the performance of a stock, bond, or commodity index.
  • It can be easily bought and sold in the market (same as stocks), gives you diversity (exposure to different industry/regional indices), and generally incur lower cost than mutual funds. >> more

Mutual funds

  • Mutual fund is a portfolio of stock or bonds created for a particular industry, country or product. It can be traded once a day based on the price (called NAV, net asset value) calculated at the end of the day.
  • Unlike ETFs, mutual funds are actively managed by fund managers and their performance could vary greatly.

Real estate / REIT

  • The investment can be in the form of: (1) owing a physical property, (2) owning stocks of a publicly-listed property companies, or (3) owing shares in REIT (real estate investment trust).
  • Real estate is an interesting and complicated type of investments and has a lot of unique properties; but in general, we can expect its investment return to fall between stocks and bonds on a long-term basis. >> more

Commodities

  • Commodity products were once open to private wealth clients only.
  • As energy and commodities kick into a big upward cycle, the products have become very popular and related funds /ETFs are being introduced to the mass market.

2. Available to high net worth clients - I will write more about each product later. For now, here is a list:

  • Structured products
  • Alternative investments
  • Hedge funds
  • Private equity / principal transactions
  • Rare collections e.g. antiques and fine arts

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