In our post titled “Should I save or should I invest?” under the heading “Before you invest” we explained why it is more interesting to invest than to keep our money in a bank account. “Investing” meaning in practice to purchase an item with the aim of achieving an income (or “return”) from it. This can be either a regular income during the time we own the item, or a profit or gain we make the day that we sell it again.
There are plenty of things that are suitable for an investment. Let’s take a look at the most important groups of them, also known as asset classes.
One asset class that probably first comes to mind when one thinks of investments, is the stock.
In simple terms, a stock is a proof of ownership. So if you buy a stock, you buy a small part of a company or, in other words, you get a stake in the company. This gives you certain rights, including the right to be involved in the company’s success. If the company makes a profit, it can decide to share this profit with its owners – the shareholders – by paying them a dividend. Since the amount of dividends depends on many factors, shares are called variable-income securities. Stocks offer the possibility of achieving both regular income as well as capital gains if their price increases as time goes by.
But beware: With the purchase of a stock you are involved not only in the success but also in the failure of the company. If the company makes losses, you will very likely not receive any dividend, and the share price is even likely to fall, so that you may finally suffer a loss as well.
Fixed income securities, called bonds or debt securities, represent a second important asset class.
When you purchase a bond, you lend the issuer (who created the bond) a certain amount of money for a certain period of time. The issuer will pay you regular interest and reimburse the borrowed money at the end of the agreed period. Bonds may be issued by companies, governments or regional and local authorities such as municipalities. Fixed-income securities are suitable for investors who wish to earn a regular income.
Real estate or properties – such as land or buildings – forms an asset class that is more suitable for a long-term investment. If a property is acquired for investment purposes, the goal is usually to generate rental income.
In addition to these three major asset classes, investors can invest their money in a variety of more or less speculative financial instruments: precious metals (gold, silver, platinum …), antiques, art objects, watches, vintage cars, fine wines … in short, in any good they expect can provide them with either a regular income and / or an increase in value over time.
All these asset classes offer different opportunities but also carry different kinds and levels of risks.
You can buy most investment items directly from a bank, broker, asset manager, real estate agent or specialized distributor. You can also buy indirectly through a mutual fund – a popular approach that is used by millions of investors.