Financial Instruments You Can Invest In

As promised in my last post, I will introduce the common financial instruments that investors use to build their wealth. Before I go on, let’s just have a disclaimer… I make no representation that I’m an expert in investing and my purpose is only in opening up your mindset. Investing is subjected to risks and I do not assume any responsibilities, even if I was negligent in providing information, if you make any decisions after reading this blog. You are 100% responsible for your own decisions. Haha, I just got to put my Business Law knowledge into use, hence this disclaimer. With that said, I expect everyone to study what they are investing in as thoroughly as the level of risk requires. Let’s move on

About Stocks
Buying stocks is basically buying a part of a company. A company might issue different classes of stocks and give different privileges to each class, such as different voting rights. There are also two types of Stocks, namely Preferred Stocks and Common Stocks. Preferred Stocks give a fixed dividend, which is a fancy term that finance practitioners give to the payment given out when investors hold stocks. Common Stocks does not guarantee fixed dividends and the company need not issue Dividends. Most of the time, when someone buys stocks, they are looking more for capital gains, which is the increase in price of the Stock. When the company grows and make more profits, Common Stockholders can achieve great capital gains.

Recommendations on Buying Stocks
When you buy a stock, remember that you’re buying part of a business. Therefore, you need to look at how the company is doing by looking at their financial statements. This form of analysis is termed Fundamental Analysis. Technical Analysis is looking at price movements and charts. Finally, there are people who invest by looking at insider activity or even from news and I kind of forgot what we call these kind of investors.

Preferably, to start investing in stocks, you should build up reasonable knowledge in Fundamental Analysis. Technical Analysis will help you time the market, although there are investors who strongly disagree with Technical Analysis. I will encourage that you read up and decide for yourself, since it’s beyond the scope of this blog post. Two approaches that are commonly adopted are Value Investing and Growth Investing, so you might want to look that up.

About Bonds
Buying Bonds is basically lending money to companies. Therefore, the returns are supposedly guaranteed, since if they borrow money from you, they got to return you. Bonds are assigned Bond ratings and generally, the better a bond is rated, the lower interest the company will pay. This is because better bond ratings assure that the company will pay you back, so investors can live with lower returns. For example, Singapore government bonds pay only 3% to 4% per year currently, but they are as good as risk-free. When a company goes into bankruptcy, bondholders get paid first, followed by Preferred Stockholders and finally Common Stockholders if there is any left. When you buy bonds, you just got to make sure that a company has enough to pay off its debts and you’ll be pretty much safe.

About Mutual Funds
Mutual Funds are basically pooled sums of money that are managed by a fund manager. Each mutual fund will specify the instruments that they are vested in like bonds or stocks, the geographic regions and sometimes specialist sectors like properties. By buying mutual funds, you are allowing someone to manage your money and you don’t need to spend as much time. The downside is that you have to pay sales charge and annual management charges which can eat into your profits. Historically speaking, many mutual funds have underperformed the stock market. However, they automatically offer diversification benefits, since a fund buys several bonds or stocks.

Exchange Traded Funds
These are basically like mutual funds, except that they are traded on the stock exchanges. Their prices are determined by supply and demand just like stocks. ETFs charge lower sales charge and annual management charge because they mostly buy just stocks in an index. For example, an ETF might track the S&P 500 index and buy just the stocks in that index, so there isn’t much managing to do.

Real Estate
I think there isn’t much need to elaborate on this. Basically, just choose a good property in a good location, buy it and rent it to others. You will likely also enjoy gains in property prices, aside from collecting the rent. For most of us, we are not rich enough to buy a second property, but there are Real Estate Investment Trusts (REITs) around that pools money from common investors together and buy properties. This might be interesting for your portfolio if you think properties are a good place to invest your money in.

Fixed Income Instruments
Fixed deposits and insurance saving plans. The interest isn’t going to be as high compared to the previous few instruments listed, but they are almost risk-free as well. Your only risk is the bankruptcy of banks holding your fixed deposits and we don’t see banks go bankrupt everyday, do we?

Conclusion
I have covered quite a bit, although quite hastily. I think it’s pretty reasonable to expect readers to be pretty confused with the way I wrote this post. Additionally, not much details has been covered. However, I think confusion is the first step to open up possibilities and spur the interest within you to read up more by yourself. Also, I didn’t cover derivatives like options and futures, because they are not really instruments of passive income.

If you want to know more about any instruments, feel free to drop a comment and I’ll elaborate more. With that, I got to end this post now. I have to keep this post within reader-friendly limits.