The world of investments is always evolving and quite dynamic. However, understanding the basic principles and the different asset classes helps individuals invest wisely. So what are the different types of investments? And how risky are they?
Although the interest earned from savings and term deposit accounts rarely defeats inflation (i.e. the increase in the general cost of goods and services which brings about a decline in a currency’s purchasing power) bank deposits are the simplest and safest investment. They give investors a detailed understanding of the interest they will earn and guarantees that they will withdraw their capital as agreed in the account opening agreement.
Apart from the deposits being guaranteed by the Bank, deposit accounts are also covered by the Depositor Compensation Scheme which is intended to promote confidence in licensed institutions and in the financial system through being financed by the banks licensed by the MFSA. Compensation is only paid if a bank is unable to meet its obligations towards depositors or has otherwise suspended payment.
Bonds are loans between investors (lenders) and governments or corporations (borrowers). The borrower issues a bond, whereby lenders can loan an amount of money to the borrower whilst earning a specified amount of yearly interest. The original investment, also known as face value or principal amount of the bond, will be given back to the investors on the bond’s due date. However, bonds may be sold at market price anytime, provided there is liquidity. Bonds, just like any other security, are sold or bought in a stock exchange, whereby prices are measured according to supply and demand for the bond.
For more information about bonds, read our article here.
Shares are also known as equities or stocks. Investors can buy equities, meaning that they can buy part (a share) of the company, and benefit from dividend payments, which are a portion of the company’s profits. Investors who buy equities are known as shareholders, and they do not own the company’s assets, but have a claim on them if the company defaults.
Equities can be either common or preferred. Those who hold common equities benefit from voting rights at shareholders’ meetings, whilst those who hold preferred equities do not have voting rights, but receive preference over common equities holders when it comes to dividend payments.
Mutual funds are a type of investment where a group of investors put together sums of money to purchase securities. Mutual funds are actively managed by fund managers, who allocate and distribute the investments into bonds, stocks, and other securities, giving investors the possibility of diversifying their portfolio. This type of investment is valued at the end of the trading day, so transactions are executed after the market closes.
You can read more about mutual funds here.
Exchange-Traded Funds (ETFs)
ETFs, also known as trackers, are meant to track the return of a particular index as closely as possible. They are very similar to mutual funds. However, unlike Mutual Funds, ETFs are traded throughout the day on a stock exchange, so their value can change a lot during a trading day, since their buy-and-sell behaviour is the same as that of the stocks. ETFs are also generally less expensive than mutual funds and offer far greater liquidity.
ETFs can be either passive or active. While the former aims to copy an index which is focused on fixed income, equities, or a mix of asset classes, the main objective of the latter is to defeat their index through a portfolio manager’s assistance.
Investing Simply but Sensibly
Investors may start with mutual funds or ETFs as simple investments before moving on to alternative investments which may be slightly more complicated. Many investors would not like to worry about monitoring their portfolios daily, so it might be easier for them to invest in index funds which reflect the market. Another solution is to entrust their portfolio in the hands of an experienced fund manager.
It is imperative to be well-informed about investments before delving into the investment world, and to avoid investments which you do not understand. It is also important not to rely on sources which are not trustworthy.
At MeDirect, we offer a wide selection of bonds, equities, mutual funds and ETFs. We are proud partners of a number of world-class fund houses, we offer pioneering research tools and we provide transparent and up to date information from Morningstar, so that you can make an informed investment decision. With MeDirect, you can benefit from low execution fees and no hidden costs, and opening an investment account is completely free. Visit our investments page for more information.
The above is for informative purposes only and should not be construed as an offer to sell or solicitation of an offer to subscribe for or purchase any investment. The
information provided is subject to change without notice and does not constitute investment advice. MeDirect Bank (Malta) plc has based this document on information
obtained from sources it believes to be reliable but which have not been independently verified and therefore does not provide any guarantees, representations or warranties.
MeDirect Bank (Malta) plc, company registration number C34125, is licensed by the Malta Financial Services Authority under the Banking Act (Cap. 371) and the Investment Services
Act (Cap. 370).