10 Oct Types of investments
When you buy a share of a company, it means you buy a piece or ‘share’ of the company. Shares are sometimes referred to as stocks or equities. The most common reason is to buy a share is the expectation of capital gain in the future. That means you buy a part of the business as you hope the value for the business – and therefore its shares – will increase in value over time. In this sense capital gain on your investment can either be achieved through capital growth of the investment or through dividends. You can buy shares through the Johannesburg Stock Exchange or through your local bank by opening a trading account.
An investor can buy investment property to earn rental income from it or for capital appreciation and sell at a later stage when the property value has increased substantially. As an investor, you can purchase an existing property or buy a piece of land and build on it or alternatively buy ‘off-plan’.
A bond is a debt instrument. A company or government issues bonds to raise money from investors willing to lend them money for a certain amount of time for an agreed amount of interest. A good example of this is, Eskom listing over R500billion to finance some of their projects and South African Retail bonds that can be bought at the post office etc.
Unit Trusts and Exchange Traded Funds(ETFs)
A unit trust is the pooled money of many investors that is invested in the financial markets through a single collective investment scheme. This allows a small investor access to the markets without having a lot of capital. Unit trusts can invest in any asset class, like Property, equity, bonds and cash.
Exchange traded funds are a form of unit trust, the difference is that with an ETF, is a passive investment. It tracks an index, for example: the JSE Top 40. Your money does well if the shares in the top 40 index do well and vice versa.
I include business as an investment because when you start a business, it is in the hope that the value will increase over a period of time whether to sell the business as a profit in the future or to grow the business so you can leave a legacy. As an entrepreneur this is one of the most fulfilling investments when you start something out of nothing and watch it grow.
For anyone considering any of the above options, educating yourself on the different types of investments is essential to make good choices as everything has risk involved. That is why diversification is important, having a little bit of every asset class mitigates against losing all capital invested.