What kinds of investments are there?
“Investments” are understood in the financial sector as different types of investment funds. The aim of an investment is always to increase the amount invested, or at least preserve its value. Popular forms of investment include classic account management, securities trading and investment in mutual funds. For investments in the financial markets, a distinction is again made between the two options for acquiring shares or bonds. See medio.sc for a summary
What legal requirements are subject to investments?
Of importance for investments is the EU law. In the context of financial products and services, this term covers all banking services and benefits related to insurance, pensions, loans and investments. In this regard, Article 5 (1) of Regulation (EC) No 1286/2014 requires that an information sheet be made available for each financial product . This document may contain a maximum of three DIN A4 pages and must be precise and clearly worded.
In legislation, the scope of application is deliberately broad. Only in this way can the law meet the heterogeneity of financial products within the EU states . Jurisdiction prevents financial providers from circumventing the current regulation.
Investors should compare several financial products before making an investment decision. In order to accomplish this, they must know the available investments. The majority of financial products are offered by lending companies . These include fixed and term money, pledged and savings bonds, certificates as well as stock and interest options . Other known forms of investment include equities, government bonds and precious metals. With regard to the nature of the financial products, it is relevant that financial innovations constantly lead to the introduction of new or the modification of existing forms of investment .
Financial products may also be divided according to their investment objectives. Here are the following goals in the investment:
- Ethical investment : In addition to goals such as security and return, this type of financial product also takes account of ethical values. For this reason, one speaks of a sustainable investment – often the abbreviation ESG (Environment, Social, Governance) is used.
- Risk Class : This investment objective is a high yield strategy that involves a high degree of risk. For investors who want to focus on security, this type of approach is not appropriate.
- Diversification : Here, the security of the investment is increased by diversification. One example is a wide range of funds that counteract sharp price fluctuations.
- Value Investing : This term refers to the strategy of value-oriented investing . In doing so, the investor orientates himself to the real economic value of the relevant investment. This approach is especially recommended for investors who seek a medium return with low risk.
Factors: The magic triangle of investment
In the magic triangle, three values are competing against each other. This means that the factors can never be met at the same time. These are the following properties:
- Security : Ideally, investing is as safe as possible. This means that there are no major price fluctuations, while at the same time the probability of a financial loss remains as low as possible.
- The return : Within a certain period investors want to achieve high profits. For this reason, it is an important factor when it comes to selecting the investment form.
- Liquidity : After the purchase, it should be possible within a short time to recover the selling price and to generate income through the financial product. In professional circles, this refers to fungibility, the interchangeability of a system, which is an important prerequisite for trading on the stock exchange.
In addition to the magic triangle factors, there are two other characteristics that may be important to particular investor circles . These are:
- The Responsibility: This states that the financial product must comply with ethical principles, so that the investor is not forced to finance by him rejected policies.
- Taxation: This factor is especially important for private investors. Return on investment is important because the income from capital income must be deducted from income tax.
To understand the investment risk, it is important to take a closer look at the overall risk indicator.
Which risks play a significant role in investments?
To understand the investment risk, it is important to take a closer look at the overall risk indicator. This provides the investor with information about three important investment risks . These are the following indicators:
- The credit risk : This gives information about the likelihood of a default of the manufacturer of a financial product. In order to avoid losses for the investor, the desired investment product should have a high credit rating.
- Market risk : This is a general financial risk, mainly due to changes in market value or holding. For equities, this translates into the danger of a price decline. This is currently one of the most important risk factors for investors.
- The liquidity risk : That factor describes the risk that an acquired product can no longer be traded on the market. If this is the case, the investor will incur a financial loss by purchasing the illiquid investment.
Each factor can lead to a total loss of the invested money. In the worst case, the investment risks can occur not only individually but also cumulatively and reinforce each other.