A guide on different forms of investments

With an average of 1-2% core inflation in Singapore and deposit rates of banks offering a 0.05% - 0.15% interest, investments can become a better choice in growing your money. Before entering any investment, make sure you are qualified and ready to invest. (Read about investment readiness)

Investing is putting forth money with an expectation for a future economic benefit. There are different kinds of investment options and it would depend on the investor in which market it prefers to enter. Regardless of how promising investments can be, it is compulsory to always do your own due diligence to minimize risks and maximize rewards.

Summary on Forms of Investments:

1. Financial Assets

A. Stocks/Equity

• Represents a share of a company, a security that gives a portion of ownership in a company.

• Predominantly bought and sold on stock exchanges that are government regulated to avoid fraudulent actions.

• Opportunities of capital gains (rise in stock price) and dividend payments (earning distribution to stockholders)

B. Bonds

• A bond is a debt security, it’s similar to a loan where you are lending to the issuer (usually a corporation or government) to finance their projects.

• In return, you are promised a rate of interest during the duration of the bond.

• Opportunities of passive income (fixed interest payments) and interest.

C. Investment Vehicle

• An investment vehicle is a product offered by the investment industry to help investors gain positive returns. These assets can be stocks, options, futures and warrants such as real estate, gold, and art

• There’s a variety of investment vehicles and holding a diverse portfolio minimizes the risk.

D. Currency

• Biggest financial market, over $5 trillion turnovers daily. Investors buy, sell and exchange in the foreign exchange to gain arbitrage opportunities.

• There are different ways to invest in the market like the spot market, futures, options, EFTs/ETNs, certificate of deposits and bond funds.

E. Derivative Contracts

• An agreement between different parties whose value is linked to the value of an underlying financial asset or set of assets.

• Most usual underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks.

• Financial instruments that are used for various purposes, including hedging, market efficiency and access to additional assets/markets.

2. Real Asset

A. Real Estate

• Unlike financial assets, real estate can be more lucrative but involve more fees. Owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance and interest over time.

• There are different ways to earn in real estate such as rental properties, appreciation, cash flow income, real estate investment trusts/groups, house flipping and online platforms (crowdfunding).

B. Gold

• Gold is very significant in the modern economy because of the fact that it has successfully preserved wealth throughout thousands of generations.

• Gold is always an asset, it can be used as a hedge against inflation and a store of value. Today, Gold can be traded through the shares of mining companies.

• Gold can be used as a safe haven, hedging, diversifying instrument and a dividend-paying asset.

C. Commodities

• Commodities are basic goods used in commerce that is interchangeable with other goods of the same type.

• Today, there are more options for participating in the commodity market like futures contracts or exchange-traded products.

• Commodities provide diversification, returns and inflation hedge.

D. Art/antiques

• Art is a long-term investment, the art market may yield large returns during boom times, but it’s an asset that can plunge in value during a recession.

• Research is key in art, it’s important to know about the artist and information of the art before purchasing to verify the opportunity of appraisals.

3. Digital Asset

A. Cryptocurrency

• Cryptocurrencies are digital currencies that are traded between consenting parties, all transactions are secured by typography, decentralized and transparent on digital ledgers.

• Immune to government interference, a strong feature of crypto as a choice of investment.

• The market is known to have the most volatility which makes it attractive yet also risky to investors.

B. Non-Fungible Tokens (NFTs)

• NFT is a digital asset that is represented by real-life things like artworks, music, GIFs, videos that are bought and sold online using cryptocurrency.

• Purchasing NFTs shows exclusiveness of owning a particular digital asset and since it’s non-fungible, its market value fluctuates a lot.

4. Alternative Assets

A. Private Equity

• Private equity are funds from usually accredited investors that directly invest in private companies, which means companies that are not listed on the public exchange.

• It’s a long-term investment for accredited investors firms to diversify portfolios and take more risk in exchange for higher returns compared to public companies.

B. Venture Capital

• Venture Capital is a type of financing that investors give to start-up/small businesses that have huge growth potential.

• It can be risky for investors, but the potential for above-average returns is an attractive payoff.

C. Hedge Funds

• Hedge fund is a financial partnership between professional fund managers and investors.

• This is an investment pool where fund managers use a range of strategies to provide good returns to clients.

Stock Market guide in Singapore

Stocks

Dividend and Capital Gains

Shareholders earn returns when they receive dividends and if they decide to sell their shares when the price of the shares gains in value. Dividends are paid out of the company’s profits. Not all the profits may be distributed. Companies may choose to re-invest profits generated from their operations into their business.

Voting Rights

Shareholders have the right to vote in general meetings of the company, Shareholders can exercise control by electing the board members, who will oversee the major decisions and policies implemented by the management.

Limited Liability

Shareholders have limited liability, in other words, their liability is limited to the amount of money invested in the shares of the company.

Exchange Traded Fund

Diversification

Investors achieve diversification in one single transaction with minimum investment versus having to build a similar portfolio by purchasing individual stocks, bonds or commodities which could require a huge investment outlay.

Cost Effectiveness

The costs of investing in ETFs are generally lower than actively managed funds (for example Unit Trusts) in the same market of assets.

Accessibility

ETFs offer access to a variety of local and global markets, as well as asset classes, both broad and specific; which may be inaccessible to individual investors.

Common categories of ETFs:

1. By country or market – eg. STI, Shanghai Stock Exchange 50, S&P 500, etc.

2. By market cap size – eg. large, mid and small cap

3. By type of assets – eg. bonds, commodities, dividend yielding, etc.

Real Estate Investment Trust

Income Distribution

Assets of REITs (ie. real estate) are professionally managed and revenues generated (primarily rental income) are normally distributed at regular intervals as dividend to REITs shareholders.

Diversification

REITs typically own multi-property portfolios, with diversified tenant pools. This reduces the risk of relying on a single property and tenant, which you face when you directly own a real estate property.

Liquidity

Compared to investing directly in real estate properties, REIT investment offers the significant advantage of liquidity – the ease of converting assets into cash. Because REITs are listed on the stock exchange, you can both buy and sell shares throughout the trading day, and in much smaller amounts compared to buying a physical property.

Bonds

Predictable Income Stream

Investors know how much interest income they can expect to receive, and how often they’ll receive it. For bonds with maturity dates, investors also know when their principal amount will be repaid if they hold the bonds to maturity.

Lower Potential Returns

Due to the certainty of the payment streams, bonds are relatively safer than other asset classes. The potential returns on bonds in terms of capital gains are therefore lower as well.