5 Different types of investment and how they work
So you want to invest, but don’t know where to start? Don’t worry – this is really common for individuals who are new to investing, and don’t yet have the experience to go about doing it. Before you go about deciding whether you want to buy stocks or just sign up for a savings plan, it’s always best to do some research first. After all, a wrong decision may cost you a lot of money!
Because everything else about investing on the internet is usually TLDR [Too long. Didn't read], we’ve created a short list summarising the different types of investing and how they generally work. Good luck!
1. Stocks
Stocks is one of the most well-known and straightforward kind of investment, and is suitable for those seeking a balance between risk and returns. By buying stocks, you’ll generally buying an ownership share in a public traded company, such as Facebook, Apple, or SIA. When you buy a stock, you’re hoping that the price will go up so you can sell it for a profit. Of course, there’s also a risk that the price may plummet and you will lose money.
To buy stock, you can do so via an online brokerage firm or work first hand with a broker. After opening an account, you can check out a list of stocks available on the SGX (Singapore Exchange), and buy the stocks you want. Do take note that the price listed is for 1 share, and Singapore shares are typically sold in lots of 100. If trading stocks seem too complicated for you, try out ETFs instead!
2. ETFs (Exchange-traded Funds)
For new investors, ETFs are usually recommended because they are more diversified than individual stocks. ETFs involve a mixture of investment types – such as stocks, commodities, and bonds – and track an underlying index while investing in any number of industry sectors. Since they are also bought and sold on the stock market, they do appear just like ordinary stock.
3. Savings Plans
If you want to invest passively, the best way to do so is by signing up for a savings plan. Not only is it non-participative in nature, but you are also able to guarantee your capital and returns – although savings plan that guarantee capital without guaranteeing returns do exist as well.
However, a savings plan does require long-term commitment, as you are required to lock your money over a fixed period of time or continually contribute for several years. If you aren’t confident that you can commit and worry about being unable to access your money for a long time, this may not be the best choice for you.
4. Bonds
The simplest way to explain a bond is that you’re basically lending money to an entity, usually a business or government body. After holding the bond for a predetermined amount of time, you are able to earn back the principal you spent as well as some interest.
For bonds, the rate of return is much lower than stocks, but bonds also tend to be lower risk. Of course, risk is still involved as the company you buy from could fold, or the government could default. But as you should know by now, all investments are accompanied by some level of risk.
5. REITs (Real Estate Investment Trusts)
REITs are a good option for people who are interested in property investing. Essentially, a REIT owns a portfolio of properties that are rented out, and the rental income is used to cover the cost of owning the properties. As for the remaining profits, they are paid out as dividends to shareholders.
REITs own numerous and various types of commercial real estate, such as office buildings, apartment buildings, warehouses, shopping malls, and hotels.