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There are many kinds of investments, each with its own level of risk and return. The more money you can make from an investment, the higher the risk that you might not get all your money back. So itās good to have a mix of different kinds of investments to spread your risk and get the results you want. And it's important to do your homework and get investment advice so you understand the risks before you hand over your money.
1. Bank savings
Savings accounts with New Zealandās major banks are one of the most common and least risky ways to store your money for the short term. Credit unions and building societies also offer savings accounts.
When you deposit money in an account you are lending it to the bank, which pays you some interest in return. The interest you can earn is relatively low, so savings accounts are not the best option if you are looking for long-term growth.
2.Term deposits
Like savings accounts, term deposits also pay interest. The difference is that you agree to lend your money to the bank for a fixed period of time such as 6 or 12 months in return for a higher rate of interest.
Sometimes you canāt withdraw the money during the term of the investment. In other cases you can, but get paid a lower rate of interest. Term deposits are sometimes called āfixed interestā investments.
3. Bonds
A bond is like an IOU issued by a government, council, or company. You lend them your money for a number of years, and they promise to pay a certain interest rate ā called a coupon. The level of risk involved when investing in bonds depends on the issuer. Unlike term deposits, you can sell your bonds early. However the price you will get can go up and down. Bonds are also sometimes called fixed interest investments.
Tip: Investments are often called assets and different kinds of investments such as bonds and shares are called asset classes
4. Shares
When you buy a share, youāre buying a small part of a company. If that company makes money, you may be paid a share of the profit, called a dividend. Like house prices, share prices are generally expected to go up over time and give you a ācapital gainā on your money when you sell. However, prices can fall in value as well
5. Property
Returns from investing in property come from rental income and from any increase in the value of property over time ā called capital gain. Some people view their own home as an investment because it may grow in value. It doesnāt have the income that letting property to other individuals or businesses brings. You can invest in commercial property directly, or through managed funds.
6. Managed funds and KiwiSaver
A managed fund is a financial product that buys a number of shares and other investments such as property, term deposits, and cash. The buying decisions are made by expert managers.
When you buy units in a managed fund you are spreading your savings across a range of shares or other investments within the fund. That means that your money is 'diversifiedā.
If you are a member of a KiwiSaver scheme you are already investing in a type of managed fund.
Tip: Most investors should have a mix of investments to smooth out the ups and downs.
7.Alternatives
Alternatives is a broad term often used to describe investments that fall outside the standard asset classes of cash, bonds, shares and property. Alternatives include commodities, currency and derivatives.
Commodities (including gold)
These investments donāt pay interest or dividends, but do increase and decrease in value which can result in a capital gain. The value of commodities often moves in the opposite direction of other asset classes (e.g. when share prices go down, gold often increases in value, and vice versa), so investors sometimes buy them to try to protect their money.
Currency (foreign exchange)
As well as being used to buy goods and services, foreign currency is also used as an investment. Currency investors are looking for higher interest rates overseas, or hoping exchange rates will move in their favour resulting in a capital gain. Investors, including managed funds, may also use currency to protect, or āhedgeā, other investments that are invested overseas.
Derivatives (including options and futures)
Derivatives are generally only used by more sophisticated investors, such as managed funds. This can be a confusing and complex area of investing. However, derivatives are built on a fairly simple concept - allowing people to protect themselves, or āhedgeā, against future price movements. For example a farmer can fix the price today, for the milk they will supply in the future. While at the same time, a supermarket owner can fix the price now for the milk they will receive in the future.
Professional investors still use derivatives for this purpose, but can now also use them to invest more efficiently.
Other alternatives
Other alternatives can include things such as private equity, hedge funds, fine wine, exotic cars and stamps. There are different reasons for buying each one, but, as with all investments, their value can go up or down.
1. Bank savings
Savings accounts with New Zealandās major banks are one of the most common and least risky ways to store your money for the short term. Credit unions and building societies also offer savings accounts.
When you deposit money in an account you are lending it to the bank, which pays you some interest in return. The interest you can earn is relatively low, so savings accounts are not the best option if you are looking for long-term growth.
2.Term deposits
Like savings accounts, term deposits also pay interest. The difference is that you agree to lend your money to the bank for a fixed period of time such as 6 or 12 months in return for a higher rate of interest.
Sometimes you canāt withdraw the money during the term of the investment. In other cases you can, but get paid a lower rate of interest. Term deposits are sometimes called āfixed interestā investments.
3. Bonds
A bond is like an IOU issued by a government, council, or company. You lend them your money for a number of years, and they promise to pay a certain interest rate ā called a coupon. The level of risk involved when investing in bonds depends on the issuer. Unlike term deposits, you can sell your bonds early. However the price you will get can go up and down. Bonds are also sometimes called fixed interest investments.
Tip: Investments are often called assets and different kinds of investments such as bonds and shares are called asset classes
4. Shares
When you buy a share, youāre buying a small part of a company. If that company makes money, you may be paid a share of the profit, called a dividend. Like house prices, share prices are generally expected to go up over time and give you a ācapital gainā on your money when you sell. However, prices can fall in value as well
5. Property
Returns from investing in property come from rental income and from any increase in the value of property over time ā called capital gain. Some people view their own home as an investment because it may grow in value. It doesnāt have the income that letting property to other individuals or businesses brings. You can invest in commercial property directly, or through managed funds.
6. Managed funds and KiwiSaver
A managed fund is a financial product that buys a number of shares and other investments such as property, term deposits, and cash. The buying decisions are made by expert managers.
When you buy units in a managed fund you are spreading your savings across a range of shares or other investments within the fund. That means that your money is 'diversifiedā.
If you are a member of a KiwiSaver scheme you are already investing in a type of managed fund.
Tip: Most investors should have a mix of investments to smooth out the ups and downs.
7.Alternatives
Alternatives is a broad term often used to describe investments that fall outside the standard asset classes of cash, bonds, shares and property. Alternatives include commodities, currency and derivatives.
Commodities (including gold)
These investments donāt pay interest or dividends, but do increase and decrease in value which can result in a capital gain. The value of commodities often moves in the opposite direction of other asset classes (e.g. when share prices go down, gold often increases in value, and vice versa), so investors sometimes buy them to try to protect their money.
Currency (foreign exchange)
As well as being used to buy goods and services, foreign currency is also used as an investment. Currency investors are looking for higher interest rates overseas, or hoping exchange rates will move in their favour resulting in a capital gain. Investors, including managed funds, may also use currency to protect, or āhedgeā, other investments that are invested overseas.
Derivatives (including options and futures)
Derivatives are generally only used by more sophisticated investors, such as managed funds. This can be a confusing and complex area of investing. However, derivatives are built on a fairly simple concept - allowing people to protect themselves, or āhedgeā, against future price movements. For example a farmer can fix the price today, for the milk they will supply in the future. While at the same time, a supermarket owner can fix the price now for the milk they will receive in the future.
Professional investors still use derivatives for this purpose, but can now also use them to invest more efficiently.
Other alternatives
Other alternatives can include things such as private equity, hedge funds, fine wine, exotic cars and stamps. There are different reasons for buying each one, but, as with all investments, their value can go up or down.
