When you have already decided to start investing for your future, a million dollar question in investing is “Where to invest?” And the answer you are looking for – is the place where you can maximize your wealth is the place where you should invest.
Now this answer differs from people to people depending on their risk bearing ability. If a person has a high risk bearing ability he may go for a high risk investment say Equities and a person with low risk bearing ability may go for lower risk investment i.e. Fixed Deposit (or FD).
Investments are of various types and are in various forms. Few investments are based on fixed returns and few are based on market conditions and of whose future cannot be predicted. But remember, not all of your money should go into one source of investment.
Investment types can be broadly classified into: Cash, Fixed Interest Securities (Bonds & Gilts), Property, and Shares.
Within each asset class there are investments to suit different kinds of risk, duration, returns and liquidity.
- Liquid Investments: Liquid investments are investments that could be turned into cash easily and resume various forms, such as savings accounts, Certificates of Deposit, Money Market Accounts, and other interest –bearing accounts offered by banks.
- Cash: Cash deposited in a bank or building society can earn interest. The amount of interest that you will get depends upon a number of different things. Savings in deposit accounts or National Savings products which offer interest, is the way most people start investing.
- Fixed interest securities (Bonds & Gilts): Bonds are issued by governments and companies as a means of borrowing money. Government bonds are known as gilt edged securities or “gilts”. Bonds issued by companies are known as corporate bonds.
Investment needs to be guided by a set of objectives. The main objectives taken into consideration by investors are capital appreciation, current income and safety of principal. The main aspect that affects the objectives is risk. Some investors are risk takers while others try to reduce risk to the minimum level possible. Identification of constraints arising out of liquidity, time horizon, tax and special situations need to be addressed.
The types of investments can be broadly classified into 3 groups:
A) Debt – Low risk, 6-12% returns
B) Equity – High risk, returns linked to market performance
C) Commodities / bullion and such – Low risk, low returns.
The investments can also be classified into:
Fixed income investments: When you invest in Fixed income investment types you will typically have a number of guarantees provided by the issuer, such as
- Guarantee that your savings will be returned to you on a certain date, and
- Guarantee that you will be paid a regular income (interest payments)
Growth investments: This section includes common shares, mutual funds, Exchange Traded Funds (ETFs) and segregated funds. Growth investments, or ownership investments, typically are considered riskier because they do not have guarantees; the value of investment is not guaranteed; the income paid by the investment is not guaranteed, and there is no guarantee that the invested savings will be returned.
So how does this work? For example, if you own the common shares of a corporation, then you actually own a portion of the company and its business operation. If the business does well, then the value of your ownership (the common shares) should increase, and as a result the company in some cases will at the discretion of the issuer pay you some money while you own the shares (in the form of dividends payments).
Hybrid investments: These type of investments cannot be strictly classified as neither a Fixed income nor Growth investment because they possess characteristics that may be those normally associated only with a Fixed income investment or a growth investment.
Investment that fall into this type would include Index – linked Guaranteed Investment Certificates (GICs), Principal Protected Notes (PPNs), Convertible bonds, Capital Trust Securities, etc.
A Hybrid investment is a trickier type of investment of to understand because its characteristics can be confusing.
Deciding how to invest? Understanding the basic types of investments that companies issue and how they fit in the corporations’ capital structure can be very helpful because the majority of retail investments originate from this structure.
You should also keep in mind that capital markets are constantly evolving and new variations of the two basic capital structures (equity and debt) are constantly created. When looking at specific investment, you should try to first identify and classify the investment’s capital characteristics.
Mostly people consider short term investment plans to make money quickly. So what do these plans contain? Short term investments allow you to invest an amount of money at a high yield interest rate, and gain access to the return sooner rather than later. So if you are interested in short term investments, talk to your financial advisor. He or she can tell you what the best short term investment opportunity you can use will be.
While planning investments it is crucial to know the strategies of managing it. There are two ways you can manage your investments- active and passive.
While investing you should first analyse what kind of investor you are according to your risk-taking capability.
- Aggressive investors: They use a stock market investing strategy that involves greater stock volatility, which is higher risk. For example, if an you put your money into an older apartment building than invests more money renovating the property, you are running a risk and you can call yourself an aggressive investor. In this case you expect to be able to rent out the apartments for more money than the apartments are currently worth or to sell the entire property for profit on their initial investments.
- Conservative investors: They often invest in cash. Conservative investment options may include mutual funds, interest bearing savings account, money market accounts, Cash deposits and US treasury bills. These investments (long-term investments) are relatively safe, low risk investments that grow over a period of time.Moderate investors: They often invest in bonds and cash and may occasionally participate in stock market. Moderate stock market strategies include low or moderate risk.
Hence, before you start investing, it is very important that you learn about the different types of investments, and what those investments can do for you. You also need to understand the risks involved, and pay attention to past trends as well.
Economic recovery likely to prove a ‘stuttering’ affair
By Rupert Thompson, Chief Investment Officer at Kingswood
Equity markets continued their upward trend last week, with global equities gaining 1.2% in local currency terms. Beneath the surface, however, the recovery has been a choppy affair of late. China and the technology sector, the big outperformers year-to-date, retreated last week whereas the UK and Europe, the laggards so far this year, led the gains.
As for US equities, they have re-tested, but so far failed to break above, their post-Covid high in early June and their end-2019 level. The recent choppiness of markets is not that surprising given they are being buffeted by a whole series of conflicting forces.
Developments regarding Covid-19 as ever remain absolutely critical and it is a mixture of bad and good news at the moment. There have been reports of encouraging early trial results for a new treatment and potential vaccine but infection rates continue to climb in the US. Reopening has now been halted or reversed in states accounting for 80% of the population.
We are a long way away from a complete lockdown being re-imposed and these moves are not expected to throw the economy back into reverse. But they do emphasise that the economic recovery, not only in the US but also elsewhere, is likely to prove a ‘stuttering’ affair.
Indeed, the May GDP numbers in the UK undid some of the optimism which had been building recently. Rather than bouncing 5% m/m in May as had been expected, GDP rose a more meagre 1.8% and remains a massive 24.5% below its pre-Covid level in February.
Even in China, where the recovery is now well underway, there is room for some caution. GDP rose a larger than expected 11.5% q/q in the second quarter and regained all of its decline the previous quarter. However, the bounce back is being led by manufacturing and public sector investment, and the recovery in retail sales is proving much more hesitant.
China is not just a focus of attention at the moment because its economy is leading the global upturn but because of the increasing tensions with Hong Kong, the US and UK. UK telecoms companies have now been banned from using Huawei’s 5G equipment in the future and the US is talking of imposing restrictions on Tik Tok, the Chinese social media platform. While this escalation is not as yet a major problem, it is a potential source of market volatility and another, albeit as yet relatively small, unwelcome drag on the global economy.
Government support will be critical over coming months and longer if the global recovery is to be sustained. This week will be crucial in this respect for Europe and the US. The EU, at the time of writing, is still engaged in a marathon four-day summit, trying to reach an agreement on an economic recovery fund. As is almost always the case, a messy compromise will probably end up being hammered out.
An agreement will be positive but the difficulty in reaching it does highlight the underlying tensions in the EU which have far from gone away with the departure of the UK. Meanwhile in the US, the Democrats and Republicans will this week be engaged in their own battle over extending the government support schemes which would otherwise come to an end this month.
Most of these tensions and uncertainties are not going away any time soon. Markets face a choppy period over the summer and autumn with equities remaining at risk of a correction.
European trading firms begin coming to terms with the new normal
By Terry Ewin, Vice President EMEA, IPC
In recent weeks, the phrase ‘never let a good crisis go to waste’ has received a large amount of usage. Management consultancies, industry associations and organisations, including the Organisation for Economic Co-operation and Development (OECD) have all used it in order to discuss how the current crisis, caused by the Coronavirus pandemic, presents an opportunity for new and worthwhile change.
The saying is also commonly used to indicate that the destruction and damage that is caused by a crisis gives organisations the chance to rebuild, and to do things that would not have previously been possible. This has the potential to impact financial trading firms, where projects that this time last year would not have made much sense now appearing to be as clear as day. In Europe, banks and brokers alike are beginning to think about what life will look like post-pandemic, and how their technology strategies may need changing.
We can think of three distinct phases when it comes to a crisis. Firstly, there is the emergency phase. This is followed by the transition period before we come to the post-crisis period.
Starting with the emergency phases, this is when firms are in critical crisis management mode. Plans are activated to ensure business continuity, and banks and brokers work to ensure critical functions can still take place so as to continue servicing their clients. With regards to the current crisis period, both large and small European banks and brokers were able to handle this phase relatively well, partly due to the fact that communications technology has reached the point where productive Work From Home (WFH) strategies are in place. For example, cloud-connectivity, in addition to the use of soft turrets for trading, has enabled traders from across the continent to keep working throughout lockdown. From our work with clients, we know that they were able to make a relatively smooth transition to WFH operations.
In relation to the current coronavirus crisis, we are in the second phase – the transition period. This is the stage when financial companies begin figuring out how best to manage the worst effects of the ongoing crisis, whilst planning longer-term changes for a post-crisis world. One thing to note with this phase, is that no one knows how long it will last. There is still so much we don’t know about this virus. As such, this has an impact on when it will be safe for businesses to operate in a similar way to how they were run in a pre-pandemic world. But with restrictions across Europe starting to be eased, there is an expectation that companies will start to slowly work their way towards more on-site trading. For example, banks are starting to look at hybrid operations, whereby traders come in a couple of times a week, and WFH for the rest of the week. This will result in fewer people in the office building, which makes it easier to practise social distancing. It also means that there is a continued reliance on the technology that enables people to WFH effectively.
Finally, we have the post-crisis period. In terms of the current crisis, this stage is very unlikely to occur until a vaccine has been developed and distributed to the masses. Although COVID-19 has caused mass economic disruption, many analysts are predicting a strong rebound once the medical pieces of the puzzles are put into place. It may not be entirely V-shaped, but the resiliency displayed by the financial markets thus far suggests that it will be healthy.
Currently, many European trading firms are taking what could be described as a two-pronged approach.
The first part of this consists of planning for the possibility of an extension to phase two. Medical experts have suggested that there could be some seasonality to the virus, with the threat of a second wave of COVID-19 cases in the Autumn meaning that the risk of new restrictions remains. If this comes to fruition, there would be a need for organisations to fine-tune their current WFH strategies and measures, and for them to take greater advantage of the cloud so as to power communications apps.
The second component consists of firms starting to think about the long-term needs of their trading systems. Simply put, they are preparing themselves for the third phase.
It is in this last sense, that the idea of never letting ‘a good crisis go to waste’ resonates most clearly.
Currency movements and more: How Covid-19 has affected the financial markets
The COVID-19 pandemic has been more than a health crisis. With people forced to stay indoors and all but the most essential services stopped for multiple weeks, economies have suffered and financial markets have crashed. Perhaps the most public and spectacular fall from grace during the early stages of the pandemic was oil. With travel bans in place around the world and no one filling up at the pumps, the price of oil plummeted.
Prior to global lockdowns, US oil prices were trading at $18 per barrel. By mid-April, the value had dropped to -$38. The crash was not only a shocking demonstrating of COVID-19’s impact but the first time crude oil’s price had fallen below zero. A rebound was inevitable, and many traders were quick to take long positions, which meant futures prices remained high. However, with stocks piling up and demand sinking, trading prices suffered. Unsurprisingly, it’s not the only market that’s taken a knock since COVID-19 struck.
Financial Markets Fluctuate During Pandemic
Shares in major companies have dipped. The Institute for Fiscal Studies compiled a round-up of price movements for industries listed by the London Stock Exchange. Tourism and Leisure have seen share prices drop by more than 20%. Major airlines, including BA, EasyJet and Ryanair have all been forced to make redundancies in the wake of falling share prices. The automotive industry has also taken a knock, as have retailers, mining and the media. However, in among the dark, there have been some patches of light.
The forex market has been a mixed bag. As it always is, the US dollar has remained a strong investment option. With emerging markets feeling the strain, traders have poured their money into traditionally strong currency pairs like EUR/USD. Looking at the data, IG’s EUR/USD price charts show a sharp drop in mid-March from 1.14 to 1.07. However, after the initial shock of COVID-19 lockdowns, the currency pair has steadily increased in value back up to 1.12 (June 25, 2020). The dominance of the dollar has been seen as a cause for concern among some financial experts. In essence, the crisis has highlighted the world’s reliance on it.
Currency Movements Divide Economies
In any walk of life, a single point of authority is dangerous. Indeed, if reliance turns into overreliance, it can cause a supply issue (not enough dollars to go around. More significantly, it could cause a power shift that gives the US too much control over economic policies in other countries. Fortunately, other currencies have performed well during the pandemic. Alongside USD and EUR, the GBP has also shown a degree of strength throughout the crisis. However, these positive movements haven’t been shared by all currencies.
The South African rand took a 32% hit during the early stages of the pandemic, while the Mexican peso and Brazilian real dropped 24% and 23%, respectively. Like the forex market, other sectors have experienced contrasting fortunes. Yes, shares in airlines and automotive manufacturers have fallen, but food and drug retailers have seen stocks rise. In fact, at one point, orange juice was the top performer across multiple indices. With the health benefits of vitamin C a hot topic, futures prices for orange juice jump up by 30%. The sudden surge had analysts predicting 60% gains as we move into a post-COVID-19 world.
Looking Towards the Future through Financial Markets
The future is always unknown and, due to COVID-19, it’s more uncertain than ever. However, the financial markets do provide an indication of how things may change. The performance of USD and EUR in the forex markets suggest there could be a lot more trade deals negotiated between the US and Europe. The surge in orange juice futures suggest that health and wellness will become a much more important part of our lives. Even though it was already a multi-billion-dollar industry, the realisation that a virus can alter the face of humanity has given more people pause for thought.
Then, of course, there’s the move towards remote working and socially distance entertainment. From Zoom to Slack, more people will be working and playing from home in the coming years. The world is always changing, but recent have events have made us appreciate this fact more than ever. The financial markets aren’t a crystal ball, but they can offer a glimpse into what we can expect in a post-COVID-19 world.
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