Types of investment asset classes
Newbies venturing into the world of investing often wonder what they can invest in.
If you're a beginner, the investment world can feel like a maze of jargon and confusion, especially with the multitude of information you're exposed to.
In this guide, we demystify the different types of investment asset classes to help you understand what each of them mean and kickstart your financial journey.
Equities
Equities are also commonly known as stocks or shares which are traded on stock exchanges and accessed through a brokerage. In essence, a holding of equity represents ownership by an investor in a company proportionate to the percentage of shares in the company that they own.
Equity ownership allows people to put their money towards companies or brands they believe in; investors buy equities with the expectation that their value will increase or sell when they expect that the value will fall.
Stocks
The term 'stocks' and 'equities' are often used interchangeably. When you buy a stock, you own a share of a company and become a shareholder, and shareholders make money either through dividends paid by the company or capital gains when the price of the stock rises.
There is a wide range of stocks available and here are 4 common categories of stocks you can choose from:
• Growth stocks
Growth stocks are stocks issued by companies that are growing quickly or poised to grow quickly. Investors are usually more willing to pay more for such stocks because of their potential for exponential growth.
Growth stocks often represent companies in emerging industries or with innovative products or services. Some notable examples include Amazon, Tesla, and Netflix.
• Value stocks
Value stocks are stocks that are undervalued by the market and trade at prices lower than their intrinsic value. These stocks are deemed undervalued because, despite their strong business fundamentals, their products or services may not be as exciting as a fast-growing company. Examples of value stocks include Ford, Target, and Procter & Gamble (P&G).
• Dividend stocks
Dividends are payouts by companies as a way to share their profits with shareholders, and dividend stocks are stocks that regularly pay dividends. Dividend stocks are popular among Singaporean investors because they're a great way to generate passive income.
These stocks are issued by companies like UOB, DBS or HSBC that are usually established and mature with stable cash flows and a healthy financial statement.
• Blue-chip stocks
Blue chip stocks are typically issued by household names with a proven track record of good performance and healthy financials. Companies like DBS, Sheng Siong or Singapore Airlines are often referred to as blue chip stocks and are well-liked by Singaporean investors.
Bonds
Bonds are typically issued by corporations or governments as a means of raising money.
When you buy a bond, you're essentially lending money to the issuer in exchange for periodic interest payments (known as coupon payments) and the return of the principal amount at the maturity date. Here's an example of how bonds work:
Benson bought a $2,000 bond with a maturity of 2 years, at a fixed coupon rate of 5%. When his bond matures in 2 years, he will receive $2,200. This number can be broken down into:
• Principal amount of $2,000
• Coupon yield of $200 ((5%*$2,000)*2 years)
• Principal amount:
The amount the bond issuer must repay when the bond is due i.e the amount you invested excluding any interest on the bond
• Maturity date:
The date when the principal amount is due and is repaid to the investor
• Coupon rate:
The interest rate paid by bond issuers
In addition, the market value of a bond fluctuates base on market demand as these bonds can also be actively traded on the secondary market.
What this means, is that even though the ‘principal’ remains unchanged, bonds may trade at a different market price, due to demand and supply. This can result in a difference between the coupon rate and the return that you would earn if you hold the bond to maturity, otherwise known as the yield-to-maturity, or YTM.
The YTM factors in the additional capital appreciation that you will receive if you hold this bond to maturity on top of the coupon amount earned.
Bonds come in various forms, including but not limited to:
• Government bonds:
Bonds that are issued by state or local governments to finance public projects like the building of roads or schools. In Singapore, the
Singapore Savings Bonds (SSBs) is one of the most prominent and popular bond among retail investors.
• Corporate bonds
These are bonds issued by companies to raise money for various purposes like to finance an acquisition or fund an expansion.
Having bonds in your portfolio helps you hedge your investments against the volatility of stock markets as you know exactly how much you will receive at maturity, while also being rewarded with interest on a regular basis.
However, it is not without risk.
While bonds are generally regarded as a safer asset, you can still lose money if the company issuing the bond goes bankrupt. But, the benefit of holding bonds is that as creditors you would be prioritised over shareholders during insolvency proceedings and can potentially recoup some of those losses.
Cash and Cash Equivalents
Cash equivalents are highly liquid short-term investments that can be easily converted into cash with little or no loss of value to your principal amount.
Fixed Deposits
A fixed deposit is a type of investment that allows you to 'lock-in' your money for a set period of time and earn a fixed interest rate at the end of duration.
It's commonly offered by banks and and is favoured by risk-averse investors due to their predictability and safety. For investors looking for a way to invest your money with minimal risk, a fixed deposit might be something worth considering.
Money Market Funds
Money market funds are mutual funds that invest in short-term securities that are relatively stable and with minimal credit risk. It's commonly offered by banks and and is favoured by risk-averse investors due to their predictability and safety.
For investors looking for a way to invest your money with minimal risk, a fixed deposit might be something worth considering.
Singapore Treasury Bills (T-Bills)
T-bills in Singapore are issued by the government with a minimum bid amount of $1,000.
They are offered at a discount on their face value and are considered short-term Singapore Government Securities (SGS). Investors have the option to choose between 6-month and 1-year T-bills depending on the issuance calendar.
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