Different Investment Products
When investing in an index, it enables you to have exposure to a complete sector that make up that index. Alleviating the problem of having to buy every single stock in one sector, as an example ASX 200 consists of the top 200 companies on the Australian stock market, you are able to buy a contract on this index or buy a share on 200 different companies to have the same exposure.
Some instruments that you are able to use on the Index trade also offer an investor the ability to leverage your exposure which will in turn multiply your risk and reward.
And one of the key features is being able to “short” an index this means that you are able to profit from the market falling in price, also helpful in being able to hedge your investments.
Bonds are issued from an institution whether that be a commercial company or a government. A Bond is a debt security or effectively a loan from the investor to the institution.
So in the same way that someone might ask a bank for money to buy a home, the bank is able to issue a bond with an interest paid to the investor for lending them the money to improve the banks business. Or when an institution needs to raise money i.e. world war two with War Bonds.
If the Bond is listed on a stock exchange then at any point an investor is able to trade the Debt Security (Bond) at market value.
A Hybrid security is one that has debt securities and equity securities. A Hybrid security will normally pay either a fixed or floating rate of return until an end date, very similar to a Bond. Although a Hybrid has higher rate of returns through using equity like features, this will give the holder an ability to covert the hybrid securities into ordinary shares.
"Hybrid security” is a generic term used to describe a security that combines elements of debt securities and equity securities. Hybrid securities typically promise to pay a rate of return (fixed or floating) until a certain date, in the same way debt securities do, this gives the investor of greater returns if the security performs well.
An ETF is an Exchange Traded Fund, is a Fund that is traded on a stock exchange. An ETF can be made up of a variety of assets these can include and not limited to commodities stocks or bonds, typically an ETF with track an index whether that be a stock, bond or gold index.
An ETF doesn’t have a cap on the amount of units that are available this is referred to as open ended. ETFs are traded and settled the same way that stock are.
A managed fund is designed for investors to get the best performance out of a large group of investments without the huge outlay. Typically a Fund manager will control the decisions and have a set guild lines to follow in how they invest, funds can be constructed buy not limited to investments such as shares, bonds, property and infrastructure assets.
Managed funds do take allot of the pressure off the investor as the decision making on the investments is left up to the fund manager.
If you do decide to invest in a managed fund then the money that you invest will be pooled together with all other investors in that particular fund and you will be issued with a percentage of that fund’s assets, then the fund will normal pay back instalments like a divided at set periods throughout the year, made from the profits that the fund has made.
A Warrant gives an investor a way to borrow to invest in other underlying assets, such as, indices, currencies, commodities and listed managed investments.
Some warrants give you the ability to buy a portion of a share portfolio in the same stock and you are still entitled to the full divided and growth from that share.
Warrants may be issued over securities such as shares and ETFs, different securities, a share price index, debt, currencies, or commodities.
Options can seem to be little more complicated to understand and also range from low risk to very high risk.
Options are able to be used to generate additionally income for a long term investor in a buy and hold security with little movement through selling call options.
And they can also be used to hedge a person’s investment by being able secure a future price of an individual security if an investor feels that the market might fall yet doesn’t want to sell their underlying stock to avoid paying a capital gains tax.
Essentially an option is a contract between two entities giving the buyer of an option the right but not an obligation to buy or sell the underlying security at a future price that had been agreed on at an earlier date.
Futures & Commodities
Futures and commodities are based off an under lining asset, such as gold, wheat, cattle or the most popular in Australia is the S&P? ASX 20. Futures and commodities are a leveraged product so it enables you to be able to long and short on positions and provided the ability for investor to also hedge their investments.
Index futures are mainly traded by institutions to achieve one of the following:
- Protect a domestic equity portfolio from short term market falls
- Arrange cost-effective exposure to an index whilst purchasing the underlying shares
- To take a trading view on the direction of the markets:
- ASX SPI 200™ index futures
- S&P/ASX 200 VIX futures
- S&P/ASX 200 Resources index futures
- S&P/ASX 200 Financials-x-A-REIT index futures
- S&P/ASX 200 A-REIT index futures