An introduction To Types Of Investments
Key Takeaways
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Investment products have different features and risk characteristics
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For more complex products, you will be required to undergo a knowledge assessment or account review before they can be sold to you
An important aspect of investing is understanding the product before you put your money in it.
You might ask:
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What are the product’s benefits, risks, limitations and transaction costs?
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What is the maximum you can lose in a worst case scenario and how might this happen?
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Will this product complement, supplement or replace your existing investments?
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Will you become over-exposed to a particular risk if your portfolio is not sufficiently diversified?
A Brief Introduction To Financial Markets
The primary market is where new issues of financial assets are sold. Examples are Initial Public Offers (IPOs) for ordinary shares and tenders for government bonds.
The secondary market is where an investor can purchase an asset from another investor rather than the issuer. The Singapore Exchange (SGX) is an example of such a stock market, or stock exchange.
Different asset classes such as shares, Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITS) are listed on the exchange. There are fixed trading hours during which the prices of the shares may go up and down.
Over-the-Counter (OTC) refers to trades made outside the organised exchanges. Brokers and dealers use a network of computers and telephones to determine prices between two parties.
What You Need To Start
To start investing, you will need:
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A Central Depository (CDP) account to hold your securities
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A brokerage account with a securities broker for trading
Common Investment Products
|
Types Of Investments |
What It Is |
What It Is Good For |
|---|---|---|
|
Shares |
Shares are issued by companies to raise capital or financing from investors. When you buy a share in a company, you become a part-owner of that company. |
Income from dividends. Capital gains if the share price rises. |
|
Bonds |
Companies or governments can borrow money from investors by issuing bonds to raise funds. * Singapore Savings Bonds (SSBs) are among the safest investments as they are backed by the Government. You can also redeem the bonds early without any penalties. |
Regular stream of interest (the 'coupon'). Preserving your capital. |
|
Unit Trusts Or Funds |
Investment product where money from investors is pooled and invested by a fund manager in a portfolio of assets. This is according to the unit trust or fund's stated investment objective and investment approach. |
Achieve diversified investment exposure. |
|
Exchange-Traded Funds (ETFs) |
A type of fund that is listed and traded on a stock exchange. Some ETFs have simpler cash-based structures while others are complex and involve derivatives. |
Achieve diversified investment exposure. |
|
Real Estate Investment Trusts (REITs) |
Unit trust or fund that is traded on a stock exchange and is invested in a portfolio of real estate assets. |
Regular income from distributions. Better liquidity than investing directly in properties. |
Not all products in a specific asset class are of the same quality.
For example, although bonds are often described as "safer", there are differing quality of bonds out there. Some are rated as investment grade while others are of lower quality (i.e. junk bonds or "high-yield" bonds).
Same goes for stocks too!
Other Investment Products
Some products are more complex than others and have terms and features that may be difficult to understand. These products are classified as Specified Investment Products (SIPs) in Singapore.
Before an SIP can be sold to you, financial institutions are required to assess your investment knowledge and experience to make sure you can understand these products.
This is done through a Customer Account Review (CAR) if you wish to open an account to trade SIPs listed on an exchange, or a Customer Knowledge Assessment (CKA) if you wish to invest in an unlisted SIPs.
Note: Remember, do not invest in products you do not fully understand.
