What are the 6 Most Common Forms of Investment?

What are the 6 Most Common Forms of Investment?

Investing is where you purchase assets, items, or invest into funds with the hope of growing your money through interest – but what are some of the most popular options that new and experienced investors choose?

In this article, the 6 investment forms we’ll look into are:

  1. Money market accounts
  2. Unit trusts
  3. Share trading
  4. Index funds
  5. Foreign exchange trading
  6. Property

Remember, there’s no better way to begin your investment journey than requesting the help of a  licensed financial advisor – our guide can help you find the right one.

Firstly, what should I consider before investing?

Before you decide to commit to any form of investment, you should consider the following:

  • How much you have to invest
  • What kind of returns you expect
  • What kind of risk you’re willing to take on
  • The advice of your financial planner

In investing, ‘risk’ is the word used to describe how likely – or often – an investment might be able to generate a profit or retain its value. For example, a risky investment might be able to generate far greater profits than a ‘safe’ or conservative one, but might come at the risk of losing all your capital or initial investment.

Understanding the level of risk you are willing to take on as an investor is key to unpacking where you should place your money, and how quickly you should expect a return.

What are money market accounts?

A money market account is a form of deposit account where interest is paid out according to the present interest rate in money markets (such as with short term loans or funding). It requires an initial deposit (usually between R10 000 and R20 000) as well as a minimum balance.

Money market accounts can be:

  • Opened at a bank
  • Withdrawn from at any time, or within a notice period
  • Slow-growing, but offer easy access and stable interest rates

Money deposited in a money market account will accrue interest over time, and will not depreciate (lose value) unless you decide to withdraw some or all of your funds. For this reason, money market accounts are traditionally seen as one of the safest forms of investment.

What are unit trusts?

Unit trusts are a form of investment where an investment manager will purchase what is referred to as a ‘basket’ of assets ranging from shares of companies, commodities such as gold or platinum, or fixed assets such as property.

Unit trusts, as a whole, break down their total value into ‘units’ that investors can purchase or sell. Investors, in this case, don’t outright purchase what is contained in the unit trust, but rather share the rights to those assets with other investors who have purchased into the trust. An investment manager will seek to maintain or balance the fund – meaning buy or sell new assets to form the fund to ensure its value and growth.

Unit trusts can:

  • Be opened with a financial manager or service provider
  • Be withdrawn from within a notice period
  • Grow quickly, but require the settlement of management fees

What is share trading?

Share trading – sometimes called ‘playing the stock market’ – is where investors will purchase shares (also referred to as stocks) in either one or various companies. Shares are representations of ownership.

A company that has gone ‘public’ offers shares of ownership that can be defined to any specific amount – for example, a company can issue one hundred shares of ownership, or as many as ten thousand. Shares are valued, accordingly, at the percentage of the company they represent.

‘Shareholders’, as they are called, buy shares in the hope that, over time, the company will either become or remain profitable and its valuation as an entity will increase.

Is share trading risky?

Playing the stock market can be risky, given that the estimated value of shares – minus the taxes and fees to sell them – update every 15 minutes on what is called a stock exchange. This means that while it is possible to make money by buying and selling shares very quickly, it is equally risky as making a loss can be as easy. However, there is no time limit as to how long a shareholder can retain their shares – shareholders can often hold their shares for as short as a few minutes, or as long as a lifetime.

What are index funds?

Buying a share (or shares) of one company can easily be called ‘putting your eggs in one basket’, as you work in the anticipation that that particular firm – and that firm alone – will remain profitable and that the value of your shares will grow over time.

Index funds, however, are the solution to this problem. Like shares, index funds are represented on stock exchanges and investors can purchase various amounts of ‘units’ or ‘stocks’ of an index fund at a time. However, rather than represent one firm or ‘asset’, index funds represent the ownership of various companies together at once.

Are index funds safer than buying individual stocks?

Typically, the companies an index fund represents have been designed to be complementary, in that some will be risky investments, while others will be comparatively ‘safe’. The only time their investment might see a significant drop in value is when the investment market itself struggles to grow or remain stable. For this reason, buying an index fund is sometimes referred to as ‘buying the market’.

What is forex (foreign exchange) trading?

If buying a share represents buying a piece of ownership in a company, buying foreign currency is like investing in that country (or group of countries’) economic activity. Buying foreign currency is useful in that – similar to shares or other investments –the currency will strengthen or depreciate over a period of time.

This can make foreign currency an attractive investment, where investors might (for example) buy US Dollars in the hope that our local currency, the South African Rand, will depreciate – meaning that in turn, the US Dollars purchased can be sold for more than they were bought.

Is foreign currency trading risky?

Foreign currency trading is inherently risky and is similar in nature to share trading where currencies can be purchased from an exchange. Naturally, the added advantage of buying foreign currency is being able to use that money to buy goods in their country of origin – a benefit that shares or other forms of investment do not possess directly.

How can I invest in property?

Buying a property is one of the most stable ways to invest, as it not only gives you a place to live or rent out to another person but can also appreciate steadily over time. However, buying a property comes with several considerations and can be incredibly expensive to both purchase and maintain. Our easy guide can help you break down many of these expenses and plan ahead!

Do I have to buy a house to invest in property?

If you aren’t financially able to purchase a house outright or through a home loan, the good news is that you don’t have to buy a house to invest in property.

Many new property funds allow investors to rather buy into funds – in a similar fashion to buying shares – where a group of investors will split the total cost of a property or group of properties to make investing more affordable and convenient.

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