The Basics of Investments

20 US dollar banknote

Investing in Cash, Fixed Interests, Property and Shares

Have a decent amount of money but not sure how to invest it? With the myriad investment options available these days, investing in the right products can be a real challenge. In general, investments that yield high returns often come with high risks. Conversely, investments with low returns are typically more secure.

Some basic understanding of how different types of investments work will help would-be investors make the right choice.

Growing Money through Cash Investments

Anyone with bank accounts has cash investments. The return comes in the form of interest. Because cash is the lowest risk, it also has the lowest expected returns. Many investors choose cash investment for short-term returns or to temporarily park their money and earn a modest interest while waiting for bigger investment opportunities.

The main types of cash investments are:

  • All cash accounts. These include savings accounts, online savings accounts and cash management accounts.
  • Cash management trusts. These work more like managed funds. Cash management trust investors, like shareholders, are given a prospectus from the company that provides the product. They pay higher interest than normal savings accounts but have fewer risks compared to shares.

Increase Savings via Fixed Interests

Fixed interest investments are good options for those willing to invest their money for longer time frames. The three features that all fixed interest investments share are fixed upfront interest rate for a set period of time; repayment of full initial capital at the maturity date and regular interest payment or payment upon the maturity of the investment.

Common fixed interest investments are:

  • Fixed term deposits. The money is invested for a fixed period of time. Penalties apply if the depositor takes out the money before the term expires.
  • Government and corporate bonds. These are loans given to the government and corporations to fund huge projects at a fixed interest rate for a specific duration of time.
  • Debentures and unsecured notes. These are usually loans given to finance companies which in turn lend the money to small businesses or other investors. Debentures and unsecured notes typically yield higher interests than government bonds because of the higher risks involved.

Invest in Property to Build Wealth

Investing in property is a long-term game. In Australia, there are several tax benefits associated with property investments. These include negative gearing (borrowing to invest and there are more loan repayments than income generated from the investment) and capital gains tax exemptions on properties occupied by owners.

Common forms of property investments are:

  • The family residence. Home owners in Australia do not have to pay capital gains tax if they sell the house they’ve been living in and make a profit out of it.
  • Residential property. Investors of residential property such as houses, apartments and condominiums are landlords who collect rent from their tenants and benefit from potential capital growth of the property.
  • Commercial property. This refers to office buildings, retail shops, warehouses and any commercial buildings or lands designed to generate profits.
  • Property trusts. This type of property investment involves pooling money from several investors. It’s a good option for new property investors or those who don’t have a big capital to invest in.

Invest in Shares to Make More Money

When someone buys a share or stock, he is actually buying a slice of an actual company. He will get dividends when the company makes a profit and enjoy potential capital growth over time. Of all the investment options, shares and stocks carry the highest risks – their prices may go very high only to plummet unexpectedly.

Those who plan to invest in shares should have sound financial knowledge and monitor the stockmarket closely. Ideally, invest in blue chip stocks offered by well-established companies with good records of profits and invest across different companies and industries. Like property investments, share investments should be for the long haul. Shareholders can buy and sell listed shares, unlisted shares and international shares.

As a rule, the greater the investment risks are, the higher the returns will be. Generally, cash investments are for shorter terms and the safest form of investment. Fixed interest investments bring more returns and are for longer terms with a maturity date. Property and share investments are the least secure but have more potential to generate more returns.