For those of us who are just starting out in the world of investing, or are not very financially savvy, we could feel lost in the “jungle” of investment jargon out there. Sometimes it’s hard to figure out what is meant by some of the terminology used, and we may not always understand everything that we read about or hear about.
If this sounds familiar, don’t worry – we are here to help simplify things so that you too, will be able to become more familiar with investing and will be able to benefit financially from the many opportunities out there.
These days we hear of so many investment vehicles and asset classes. Property, stocks and shares, fixed deposits, unit trusts, art investments, bonds, REITs, etc. etc. But how are we to assess which one is suitable for our individual needs?
Maybe we can start by breaking things down into the simplest possible question, which is basically – are we buying something from someone? Or, are we lending our money to someone?
Let’s look at the “lending” category first.
The easiest example here, is fixed deposits. Under a fixed deposit, we “lend” our money to the Bank for a fixed period of time, in return for which, the bank pays us a fixed sum of money, in the form of interest.
Or, another asset class that operates this way is bonds. A bond is a debt instrument issued by a particular institution or entity. When you “buy” the bond, you are buying a promise from the issuer of the bond, to repay the principal (together with interest in some cases) on a specified date (also known as “maturity”). In other words, you are lending money to the issuer of the bonds, in return for which you might also receive positive cashflow in the form of coupons or dividends.
The above asset classes are low risk, as far as the investor is concerned. An entity known as Persatuan Insurans Deposit Malaysia (PIDM), actually guarantees the fixed deposits you place with a local bank, up to RM 250 000 each. This means that in the unlikely event of the bank’s collapse or failure, your deposits are protected. This should help even the most risk-averse investor sleep well at night :)!
Unfortunately, while they are safe and secure, fixed deposits and bonds are also low-return. One is certainly not going to become an overnight millionaire by investing in fixed deposits and bonds. In fact, leaving large amounts of money in fixed deposits over a long period of time is not advisable, as when the rate of inflation increases compared to the fixed deposit interest rate offered by the bank, your capital could actually be eroded over time. Bonds are also not immune from the effect of inflation.
Let’s turn now to the “purchasing” category.
Investing in shares as an asset class usually means, purchasing listed/quoted securities; in other words, shares in a listed company on the stock exchange. Purchasing a share in a company would make you the owner of part of the company (you could own a very small amount, if the company is a large conglomerate with thousands of public shareholders listed on the Main Market, such as a bank – or a larger amount, if the company is listed on the ACE Market and is not a very big company).
Ownership of shares entitles you to a range of rights as a shareholder, including the right to earn dividends on the share as and when declared, and also, the right to deal with the share – meaning to say you can buy or sell the share at any time. Investing in shares/equities as an asset class could be highly profitable with very attractive rates of return in comparison with other asset classes.
However, not everyone who invests in shares makes money. In fact the opposite could be true if we are not very savvy and merely trade based on rumours and “tips” from brokers, friends and relatives.
Profiting through investing in equities requires a detailed understanding of the share market, market research, and fundamental and technical analysis on share prices. For newbies hoping to make a quick buck, the volatility of the market poses some risk.
However, so as not to miss out on the benefits of having equities as part of your trading portfolio, it might be a better to purchase small holdings in “blue-chip” and high-performing companies on the stock market and take a long term approach; meaning to say, hold on through the upswings and downswings of the market cycle.
Let’s also look at a very popular asset class amongst Malaysians – that’s right, you guessed it. Property! As a nation, we love to invest in property. Property also falls into the “purchasing” category. Basically, we have to purchase the property before it can generate returns for us. So, what kind of property can we look at for investment purposes?
Unfortunately, we can’t include our own home in the category of an investment – simply because, we are living in the property, and so it is not actually generating any returns for us. Though of course, if you hold on to your home for the long term, given the steadily appreciating property market, chances are you will make a profit when you decide to sell it and move elsewhere, a couple of years down the road. (Beware however of capital gains tax, if you do opt for sale – try to hold on long enough to cross the threshold).
Investment property is usually property you have been able to acquire other than your actual home. Such property can be rented out to generate a steady income. The amount paid to you in rental could help service your loan. In time, your tenants would have “bought” the property for you. And you could also sell it later when the time is right. Malaysia has a young population and an ever-expanding middle class.
Every year, thousands more are coming into the property market seeking affordable housing. For landed properties, demand outstrips supply. Property, especially landed property, is almost a sure winner when it comes to investment. Of course there are some downsides. Property is very, very expensive and not everyone can afford to opt for this asset class. Also, one needs to be careful in choosing the location of the property.
If the neighbourhood is not yet mature and there is difficulty finding a tenant, you could find yourself in a tight spot in servicing the loan. Property bubbles can also burst, leading to oversupply on the market for apartments and condos.
Hopefully, this brief intro to some of the more popular asset classes has been helpful to newbie investors out there.