What are financial investments?
Financial investments are rights acquired by the company, which form part of the assets of the entity, and represent the capacity to obtain liquidity in the future, either from their sale, in the form of returns or both.
How do financial investments work?
Financial investments are those that acquire securities related to the financial market, with the objective of obtaining profits from the capital placed through the performance of these assets.
Types of Financial Investments
In the financial markets, in addition to shares in companies, an investor has at his disposal the possibility of investing in a multitude of asset classes. Nowadays, with the facilities offered by the majority of broker platforms, it does not make much sense for us to only operate in the stock market.
How should we classify
financial investments?
There is no single standard way to do this and, in reality, each expert uses the categorisation of investments that he or she considers most appropriate according to his or her point of view.
Well, from my point of view, the most common types of financial investments would fall into the following list.
- Equities
- Stock market indices
- Foreign exchange
- Metals
- Commodities
- Energy
- Real Estate
- Bonds
- Short term fixed income
- Alternative investments
- Money market deposits
What are the main investments
I will now discuss in a little more detail the main investments that can be found in each of the above points.
1. Stock market shares
This is the best-known type of investment and, normally, the first one that the beginner investor usually comes into contact with. They receive the most publicity and are also the most easily accessible through bank brokers’ platforms. This makes it very simple for the novice to place a buy order on a given security.
Stocks are usually grouped into various indices according to the capitalisation of the underlying companies. Thus, in order from largest to smallest, we can speak of Blue Chips, Large Caps, Medium Caps, Small Caps, Mini Caps and Micro Caps. In general, the smaller the size, the higher the annualized return and the higher the associated volatility.
Of course, there are also experienced investors who trade Stocks, although they generally do so to include them in their long term portfolios rather than for short term trading.
2. Stock Indices
This is actually a variant of the previous type. However, I have chosen to put it separately because index investing tends to attract more qualified investors than stocks. This is probably because buying an index cannot be done in a simple and straightforward way. Instead, specific tools such as Futures, Options, CFDs, Warrants or ETFs must be used. Unfortunately, most people only tend to do things if they are simple.
The advantage of indices is that they allow us to invest in the economy of a region or a country without having to risk choosing a single company to put all our capital into. For example, if we have confidence in Italy, we can invest in the MibTel index instead of ENI.
3. Currencies
Investing in currency pairs (such as Euro/Dollar, Dollar/Yen or Pound/Dollar) is usually done through the platforms of Forex brokers, but can also be done through other financial derivatives such as Futures, Options, CFDs or Warrants.
4. Metals
This is an interesting type of investment as it is often used by more experienced investors as a hedge for stock market operations (as is the case, for example, in the Stock Market and Metals Investment Strategy). Obviously, the kings in this section are Gold and Silver.
Typically, investment in metals is divided into two major groups:
Precious metals:
Such as Gold, Silver and Platinum.
Industrial metals:
Such as Copper, Palladium and Aluminium.
5. Commodities
This is a group that allows us to invest in a wide variety of financial assets. In general, only the most advanced investors tend to operate with them, as it requires great knowledge of the derivatives markets (Futures, Options, CFDs and Warrants). However, there is also an easier way to invest in these markets, which is to allocate part of our capital to buy an ETF specialised in this sector.
I am not going to enter into the debate on whether it is ethical or not to engage in speculation in the commodities markets, as there are opinions to suit all tastes. The idea here is only to reveal the existence of this type of investment and my aim is not to encourage food trading. Every adult should be able to make his or her own decisions.
M. P. Agricultural:
Such as Corn, Wheat and Rice.
M. Perishable P. P:
Such as Cocoa, Coffee and Sugar.
M. P. Livestock:
Such as Cattle, Pigs and Dairy Cattle.
6. Energy
This is actually also a type of commodity investment. However, due to the very particular properties that characterise it, it is best to clearly separate it from agricultural and livestock. Here the king is oil, an asset widely used by experienced traders. However, it is not the only energy commodity available for trading and we can also work with other assets such as Natural Gas, Gasoline and Heating Fuel.
In general, we are talking about investments with high volatility. This characteristic makes them very appealing to expert traders and, at the same time, not very recommendable for beginners and even intermediate level investors. They are two sides of the same coin… Having seen the first typologies of the list, next day (in a new post) we will finish looking at the main types of investment. Let’s remember that, as we said at the beginning, the following are still pending: Real Estate, Bonds, Short-Term Fixed Income, Alternative Investments and Money Deposits.
7. Real Estate
This type of investment, which caused the economic crisis of 2008, does not need much introduction: practically everyone knows what real estate is. However, we should point out that we are talking here about financial investments and, therefore, we are not talking about speculation in physical assets.
Fortunately, in the financial industry there are also tools for investing in the real estate market without the need to physically acquire a property. Today, the best-known alternatives for operating with this type of asset are the following:
– Real Estate Funds: these are funds that use the capital of the participants to buy real estate assets and make them profitable by renting them out.
– REIT and SOCIMI companies: SOCIMI companies (in Spain) or REITs (outside Spain) are companies that buy real estate assets and obtain profits through their subsequent sale or, above all, by renting them out.
– REIT sector funds and ETFs: these are funds and ETFs which, as can be deduced, invest only in REIT companies.
8. Bonds
This is a type of fixed income investment where the investor delivers long-term capital (e.g. 10 years or 20 years) and, in return, receives an annual coupon of a predefined fixed return. Bonds can be public (government bonds) or private company bonds.
It should be noted that Bonds can be invested in two opposite ways:
– On the one hand, we can deliver the capital until the maturity of the full term and dedicate ourselves to collect the annual coupon without any further surprises (something like collecting the annual dividends of the shares of a company). This would be similar to having a fixed-term bank deposit.
– On the other hand, we could go to the secondary market and try to speculate with the purchase/sale of Bonds (as is done with shares on the Stock Exchange). In this second case, we should bear in mind that, although it is called Fixed Income, the volatility of the market (and therefore the losses) could be high.
9. Short-Term Fixed Income
This type of investment is similar to the previous point, but in this case we are working with shorter time periods. It should be noted that this is the safest investment we can find in the financial markets. Bonds with maturities of less than 2 years or, at most, 3 years would fit into this section.
Although it varies slightly from one country to another, in Spain this type of investment would be represented (in its public version) by Letras del Tesoro. This is a type of bond with a maturity of less than 18 months and backed by the State.
10. Alternative investments
In this section I include all those financial investments that are easily accessible today but which are not regulated by any official body. Although they can be very profitable, we must carefully evaluate where we deposit our money: in the event of bankruptcy, we will not be covered by the FOGAIN (Investment Guarantee Fund).
It is a rather heterogeneous type of investment and it would be very difficult to cover all its possible variants. A non-exhaustive list of this type of investment would be as follows:
– High Yield Investments: HYIP (High Yield Investment Program) plans or investment in unbacked currencies (such as Bitcoin).
– Investment plans in various assets: Plans in stamps (such as those of Afinsa), Plans in raw materials (such as those of Bosques Natural forrest) or Plans in art (such as those of the company Art and nature).
11. Money Deposits
This section refers to the use of bank deposits, either directly or through a specialised investment fund. I have been hesitating until the last moment whether to include this point in the list since, from my point of view, deposits would be a type of Savings and not a type of Investment. But well, I have finally decided to leave it out in case anyone missed it.
In general, Forex (Foreign Exchange) brokers offer better commissions than the rest and allow a huge leverage of 1:100, 1:200 or even 1:400. Hence the great success that this market has experienced in recent years, fuelled by a multitude of novice traders looking to get rich in a short period of time. It is very dangerous to be seduced by this game, but I want to make it clear that it is not the Forex itself that is risky, but the fact of not knowing how to trade with such high leverage accounts.
Temporary financial investments
Time is a determining variable in any investment process. There is little difference between an investment approach over a period of a few years and one relating to, for example, retirement planning, which can extend up to four decades. The needs in terms of expected return, risk taken or liquidity of the investment will differ significantly.
While there is no single criterion, we can distinguish three types of investments according to the time horizon considered:
- Short-term investments: those with an approximate duration of up to one year are classified as short-term investments.
- Medium-term investments: this category includes investments with a term of between one and five years.
- Long-term investments are those with a term of more than five years.
Short-term
financial investments
Two criteria generally prevail in this type of investment: security and liquidity.
Security because there is no time margin to deal with unforeseen events. Highly volatile investments that put the invested capital at risk, such as stock market investments, should be avoided. This is suitable for long-term investments, where volatility is diluted over time and the returns obtained are usually much higher than those offered by more conservative assets, but it is not recommended for shorter terms.
Liquidity is the property of financial and savings products that defines the ease and speed with which they can be converted into money. The more liquid a product is, the easier it is to unwind it and get the money back. In short-term investments, it is essential to have this quality.
Where to invest short-term
Some of the vehicles that can channel short-term investment under the premises described above are:
- Deposits or interest-bearing accounts: The return is fixed in advance. It will be lower in low interest rate environments, but we will enjoy high liquidity and security.
- Treasury bills: these can be purchased from a nominal amount of €1,000. They are short-term fixed income securities represented exclusively by book entries and are issued at the following maturities: 3 months, 6 months, 9 months and 12 months. If you wish to unwind your positions early in the secondary market, the price changes are usually quite small. They are therefore very low-risk assets.
- Conservative investment funds: Investment funds are highly liquid, as they are usually credited to the account within one to three days of the sale order. In order not to incur risk in the short term, the most suitable funds are those that invest in short-term fixed income assets with low volatility.
Long-term
investments
The objective of long-term investments is to achieve financial results over an extended period of time, where the fees that could be earned will not be presented immediately. These financial investments usually require a significant amount of money, but are considered operations with a low risk of loss.
One of the advantages of long-term financial investments is the possibility of significant margins. However, it is important to take into account the volatility levels of the assets, to choose those with low levels, which do not require constant monitoring of their prices and which are not mostly affected by external movements. An example of these is the purchase of corporate bonds, or futures contracts with long-term maturities.
Some of the characteristics of investing for the long term are the time over which trades are held, which can be 3 years or more; and also, the investment costs involved in paying market entry fees, broker commissions, account maintenance, portfolio diversification and extra money to hold investments when they decline.
Some assets in which it is possible to make such financial investments are stock market shares, real estate and mutual funds.
Properties
