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Saturday, May 12, 2012
We all have heard time and time again about the importance of investment but most of us could not grasp it...myself included...
Anyway, here are a few basic categories of investment that one can consider:
When you own stocks or shares in a company, you own part of that company. As a shareholder in the company, you are entitled to any dividends that the company pays out. There are usually two reasons for investors to buy stocks: dividends and capital appreciation. There are many factors that determine the price of a stock, but in general, the company's earnings...
From historically point of view, stocks have often done much better in comparison to bonds over the long term. In the short term, stocks are more volatile, where it can swing wildly compared to other types of investment. Stocks are the ones that will give the highest return as well but it comes with the highest risk.
For those of you who buy a bond, you must realize what you really are buying. When you buy a bond, you are lending money to the bond issuer. Normally, these bond issuers are companies or governments, intending to borrow money from you, the bondholder, and promises to pay all of it back at a certain date. It comes with interest, known as the coupon, on the annual or semi-annual basis.
In comparison to other financial investments, bonds have a lower returns but it comes with the least risk...for those of you who are not fond of taking risk, bonds could be a suitable option.
Take note that bonds move in the opposite direction of interest rates. When interest rates rise, bond prices fall and vice versa. If you intend to hold the bond to maturity, these fluctuations should not bother you. However, one must take note that inflation is a bond's worst enermy. As bond interest payments are fixed, the inflation erodes their value.
3) Unit Trusts
Unit trusts, which is also known as the mutual funds, are baskets of stocks, bonds, real estate and other investment instruments. When one buy unit trusts, they are actually purchasing a piece of that fund, a slice of the investment pie. Although the fund may own stocks and other assets, you do not actually own any of those asset themselves. The value of the unit trust is based on the value of the assets it owns. Hence, the unit trust's value rises and falls as the price of the stocks, bonds and such go up or down.
One of the good thing about purchasing unit trusts is that the actively-managed unit trusts, is managed by dedicated professional, fund managers who decide what to buy and sell....thus, making unit trusts amazingly suitable for "working professionals who might be very busy and don't have a lot of time to spend looking at their investments."
These unit trusts typically charge management fees and sales commissions, thus making it a lower return in comparison to individual stocks.
Exchange traded funds are the new kids on the block. Basically, they are similar to index funds with one exception, they are listed and traded on a stock exchange. Simply put it: ETFs consist of similar assets as index funds but trading is being done in similar ways to stock exchange. There are ETFs for stocks, bonds as well as commodities....one of the biggest ETFs in the world tracks the price of gold.
It is considered to be much more cost effective than the mutual funds. Normally, one only needs to pay a transaction fee, just like when one did so when buying stocks. Typically, the charges are lower than those of mutual funds. As they are being traded like stocks, their price changes throughout the days as they are bought and sold much more easily than unit trusts, which is priced on a daily basis. In terms of risk, it is very much similar to index funds.
5) Foreign Currency Deposits
Well, you can know this from the name itself....bank deposits in a foreign currency. Often, these are known as foreign currency fixed deposits as the money is kept in the account for a set period of time. The bank also promises to pay you a fixed interest rate for the duration of the deposit. Besides receiving the interest, you may also receive a foreign exchange gain.
This is how it works: when you place the money into the account, the bank converts it into the foreign currency. At the end of the duration, the bank will convert it back into your local currency. If the foreign currency has risen in value against your own currency, you will get back more of your local currency in the conversion. However, if the investment currency depreciates in relation to your local currency, there is a loss. Thus, one can consider this as less risky than stocks but riskier than bonds.