Investing in revenue-producing assets can be confusing. There is a lot of financial jargon to wade through and it’s often not easy to decide which asset best suits your needs and financial goals. In this article we will simplify stocks, bonds and funds.
Stock (equity) is when you purchase shares in a company. The price of a share, purchased via an exchange such as the Australian Securities Exchange (ASX), is largely determined by supply and demand. Generally, more buyers than sellers will increase the stock price and more sellers than buyers will see the share price fall.
The share price multiplied by the number of issued shares equates to the ‘market capitalisation’ of the company, effectively what the market views as its present total value.
Shareholders may be entitled to receive dividends (a distribution of the company’s profit) taken as cash or further equity.
Bonds are debt instruments and are classified as a liability for the issuer. You do not become an owner of the business, rather you make a loan to the business which is repaid to you with interest.
Bonds are usually classified by the type of interest paid (fixed, floating or indexed) and split into categories based on the issuer (corporate or government bonds).
Government Bonds are one of the safest investments in Australia as the interest and the face value payment at maturity are guaranteed by the government. The cost of a bond is tied to interest rates so when interest rates rise, bond costs fall. You can sell a bond back to the government rather than waiting until it matures but you may be faced with a capital loss if you do so.
Managed funds & exchange traded funds
Managed funds are investment schemes whereby your money is pooled together with other investors and professionally managed by a fund manager. Investors purchase units in the fund. The unit price is determined by the net asset value of the fund divided by the number of unitholders and there will be a buy/sell spread which accounts for transaction costs. The unit price rises and falls in line with the value of the underlying assets.
You are usually paid bi-annual distributions which may be taken as cash or reinvested into additional units.
Managed funds can be unlisted and bought directly from the fund manager, a broker or intermediary, or listed on a securities exchange.
Managed funds offer substantial diversification due to your investment being used to purchase a myriad of researched stocks across a wide range of markets or sectors by the professional fund manager. A fund may invest in a single asset class or a combination of many, such as value vs growth, low-cap, medium-cap, high cap, international vs Australian equities and GICS1
Exchange traded funds are a lower feee and more liquied alt to man funds.
A Listed Investment company (LIC)
A Listed Investment company (LIC) is another investment option. They are similar to a managed fund and available on a securities exchange such as the ASX. The price you pay per share may be at a premium or a discount to the net asset value of the portfolio.
Ultimately, the key to a well balanced long-term portfolio of investments is diversification, so whether you use a fund manager to achieve this, purchase stocks or bonds directly or invest in other assets (such as real estate) the best portfolio includes a range of investments.
BDH Leaders provides a full range of wealth management services aimed at assisting you to achieve your financial goals. Contact us for further information.