You have the choice
The first question you are faced with as an investor is deciding on the type of investment.
This involves weighing up the opportunities and risks, deciding on an investment horizon and taking into account the availability of the capital. The various types of investment category are described below:
Safe with a modest return. That is a brief description of investing in bonds. The process of purchasing a bond is similar to granting a loan. As the lender you give the borrower a specific amount in advance and receive the interest due in return. The amount payable in interest depends among other things on the solvency of the borrower and the general level of interest rates.
A fundamental difference between bonds and loans is that bonds are quoted on the financial markets and are therefore tradable. Due to the fact that interest rates have been low for many years, an investment in bonds may be unprofitable if the fees and inflation exceed a low amount of interest income.
Ever since the share markets came into being (in the 1920s) investments in shares have managed to generate an average and long-term return of around eight percent. When you purchase a share you, the buyer, automatically become a co-owner of the company in question. In return for the capital invested you, the shareholder, receive a portion of the company’s profits (referred to as dividends) and are exposed to losses and gains in the share price.
Given that the expected long-term return of approx. eight percent is clearly higher than in the case of bonds, the question that arises is why invest in bonds in the first place. One reason is the higher risk associated with investments in shares due to short- and medium-term fluctuations in the share price. This is why you should consider whether you want and are able to run this risk.
For years a strong tendency towards investments in property can be observed. In the long term, investments in property yield less than shares, but are regarded as safer. For many investors, ownership of a physical and tangible investment is yet another argument in favour as opposed to shares and bonds, where the securities merely exist on paper.
The disadvantage of directly investing in property is that a considerable amount of capital is required. Hence direct investments are often not feasible for small investors. In such cases, the investments must be made indirectly through property investment funds.
Luxury goods such as wine, watches or works of art constitute alternative forms of investment and are recommendable. The main advantage resides in the fact that the evolution of the value of luxury goods has virtually no correlation with other investment categories. This means that luxury goods may well be a good option. When deciding which goods to invest in their collector’s value often plays an important role.
The extent to which luxury goods increase in value over time or depreciate because of changes in economic cycles and in society cannot be predicted. Moreover, this type of investment requires expert knowledge of market trends, the genuineness of products and storage.
Take advantage of every market situation
Stock options with a leverage effect offer you the chance of attaining an above-average high return for a relatively modest initial outlay, both if share prices rise and fall. The following simple example illustrates how this leverage effect works.
You invest 1000 US dollars (USD) in 10 classical company shares each with a nominal value of 100 USD. The company’s share price rises by 15% to 115 USD. You now hold shares valued at 1150 USD. If you purchased the share with an initial outlay of 1000 USD, you obtain a profit of 15% or 150 USD.
Instead of investing in shares you only invest 100 USD in 10 stock options (the share in our example) with a nominal value of 10 USD. The increase in the share price by 15% and 15 USD per share means that the value of stock option likewise increases by 15 USD. They are now traded for 25 USD. You now hold stock options valued at 250 USD. If you sell the stock options you obtain a profit of 150 USD and 150% with an initial outlay of just 100 USD.
In the case of a call option, falls in share prices also have a negative effect on the stock option and can lead to the loss of the entire amount. Whereas with a share portfolio, if share prices fall you inevitably suffer losses, in the case of stock options you have the possibility of taking advantage of such situations with put options by betting on falling share prices.
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