Overview
The goal of investing is to grow one's wealth over time and different investments come with varying degrees of risk and potential return. It's important to do your research and consult with a financial adviser before making any investment decisions. Additionally, diversifying your portfolio by spreading your investments across different asset classes, sectors and geographies can help to reduce overall risk.
What is an Investment?
Investment refers to the act of allocating resources, usually money, to an endeavour with the expectation of obtaining an additional income or profit. It can take many forms, such as buying shares, bonds, real estate, or other assets, with the goal of generating future income or capital appreciation.
The primary goal of investing is to grow wealth over time by earning a return on investment. The return can take the form of dividends, interest, rental income, or capital appreciation.
Types of Investment
Investments can be classified as 1) Defensive investments and; 2) Growth investments.
Defensive investments
Defensive investments are those that are considered to be less risky and tend to perform well during times of economic uncertainty or market volatility. These investments are often used as a way to protect one's portfolio from losing value during market downturns. Some examples of defensive investments include:
Bonds
Bonds are considered to be less risky than shares because they typically pay a fixed rate of return. They are issued by companies and governments, and their value tends to be more stable than that of shares.
Cash and Fixed Term deposits
Cash and cash equivalents, such as savings accounts and Fixed Term Deposits, are considered to be the safest type of investment. They are considered to be low-risk because they are not subject to the same price fluctuations as other investments.
It's important to note that defensive investments may not necessarily provide the highest return and they may be affected by market conditions, inflation and other factors. Investors should diversify their portfolios and have a balance between defensive and growth investments according to their risk tolerance and goals.
Growth investments
Growth investments are those that are focused on generating capital appreciation rather than income. They tend to have higher risks, but also have the potential for higher returns. Some examples of growth investments include:
Shares
Shares are considered to be growth investments because they represent ownership in a company and have the potential for capital appreciation. Some shares, particularly those of small or emerging companies, can provide higher returns than more established companies but also carry a higher level of risk.
Small-cap and mid-cap shares
Small-cap and mid-cap shares are shares of smaller companies that have the potential for significant growth. They are considered to be more risky than large-cap shares but also have the potential for higher returns.
Real estate
Investing in real estate can provide the potential for capital appreciation when the property value increases over time. Real estate investment trusts (REITs) are a way to invest in real estate without owning a property.
Private equity
Private equity investments are made in private companies that are not publicly traded. These companies are often in the early stages of growth and have the potential for significant returns, but also carry a higher level of risk.
Commodities
Investing in commodities such as precious metals, oil, and agricultural products can provide the potential for capital appreciation when the prices of these commodities rise. However, the prices of commodities can be volatile and can be affected by a variety of factors such as weather, war, or natural disasters.
It's important to:
- note that the risk and return of growth investments can vary depending on the specific investment and market conditions; and
- conduct thorough research and due diligence before making any investment decisions and have a well-diversified portfolio.
Common Investment Structures
There are several common investment structures that investors can use to invest their money, each with its own advantages and disadvantages. Some of the most common investment structures include:
Individual shares
An individual share represents ownership in a single company and can be bought and sold on share exchanges. This structure allows investors to have direct control over their investments and make investment decisions based on their own research.
Managed funds
A managed fund is a type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of shares, bonds, or other securities. Managed funds are managed by professional fund managers and offer investors the ability to gain exposure to a variety of assets with a single investment.
Exchange-Traded Funds (ETFs)
An ETF is a type of investment fund that is traded on share exchanges, similar to shares. ETFs are a basket of shares, bonds, commodities, or other securities that track an index, commodities, bonds, or strategies. ETFs provide investors with a diversified portfolio in a single investment.
Real Estate Investment Trusts (REITs)
A REIT is a type of investment trust that owns and manages income-producing real estate. REITs allow investors to invest in commercial real estate without the need to purchase or manage a property themselves.
Hedge funds
A hedge fund is an investment fund that pools money from multiple investors to pursue a specific investment strategy, such as hedging against market risk or taking long and short positions in different securities. Hedge funds are typically only available to wholesale investors.
Private equity
Private equity is an investment structure that involves investing in privately-held companies that are not publicly traded. Private equity investments can provide the potential for significant returns but also carry a higher level of risk.
The choice of investment structure will depend on the investor's goals, risk tolerance, and investment horizon. It's important to do your own research and consult with a financial adviser before making any investment decisions.
Important information and disclaimer
- Any advice on this publication is of a general nature only and has not been tailored to your specific circumstances. Before taking action on this information, please seek your personal advice. Past performance is not a reliable guide for future returns. The information on this page reflects our understanding of the existing legislation, standards, etc.
In some cases, the information has been provided to us by third parties. While the information is believed to be accurate and reliable, but this is not guaranteed in any way. - Neither AIFP nor its responsible persons or employees give any warranty of accuracy, nor accept any responsibility for errors or omissions in the information provided on this page.