“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
- Warren Buffet
Asset types, or asset classes, refers to the instrument in which you are investing. Investing can be done in many different ways. Most people associate investing solely with financial instruments like stocks and bonds. However, a variety of alternatives exist.
Stocks are probably the most well-known financial investment asset class. A stock represents a part of the invested capital in a company. As such, if you owe a stock, you are (partial) owner of that company. If the perceived value of the company goes up, the value of the stock goes up with it.
Companies can be valued in many different ways. Some investors use predicted sales to estimate revenue and profit, and consequently the value of the company; Some investors use the past dividend streams to define the future value of a stock; Others analyse and predict entire sector trends based on macro-economic activity. Still others use gut feeling to determine whether a company's value will increase. Remember our discussion on valuation, that there is not one and only way to value a company. Generally spoken, we can state that a company is valued on the sentiment of its business performance.
Company value: Dividend stream, Forecasted sales, Business performance,...
Solvency of the issuing instance
Bonds are debt instruments and can be issued by both companies and governments, which are in need of money. In contrast to stocks, bonds do not represent a part (of the capital) of the company. Bonds represent a part of debt that the issueing instance has against the investor. So basically the bond investor is lending out cash to the instance in need of cash.
Bonds come in many forms. Usually they have a pre-determined redemption date (a date at which the borrowed money is reimbursed) and amount, plus recurring interest payments.
When a company goes bankrupt, debt pay-out has priority over capita pay-outl. This means that if you are holding both stocks and bonds of a company that goes bankrupt, the bond will be paid out first, and only if enough means remain, the capital (stocks) will be paid out last. That is why bonds are often seen as safer assets compared to stocks.
Funds, or Mutual Funds are instruments that pool together different assets, like stocks and bonds. A mutual fund is managed by a fund manager and offers the advantages of diversification. Many different types of funds exist, according to their composition.
Traditional funds consist of a combination of stocks and bonds. The allocation between stocks and bonds usually result in a risk profile of that fund.
Specialty funds focus on a specific market, either according to the industry, region, some other funds are based on religious aspects. Examples include New-energy funds, Emerging-markets funds, Islam-proof funds, ...
Index funds are portfolios which intend to duplicate market indexes.
Most mutual fund managers are well known, large financial institutions. Some of them are linked to a bank like for instance BNP Investment Partners (BNP Paribas Group), NN Investment Partners (ING Group), while others are independent like BlackRock or Amundi.
ETF's or Exchange Traded Funds are similar to Mutual Funds, in the sense that they pool together a selection of stocks. Most ETF's are designed to imitate indexes and hence are fairly similar to Mutual Index Funds. ETF's however, in contradiction to Mutual Funds, are exchanged like stocks, meaning that you can buy and sell ETF on a market, just like you can do with stocks.
This implies that when investing in a Mutual Fund, you actually deposit money into the accounts of your fund manager, who, at his turn will buy stocks and bonds according to the fund's distribution. Another important difference is that ETF's are usually designed to passively imitate an index, while a Mutual Fund requires the labor of a fund manager. As such, ETF's are usually cheaper to invest in as they incur lower management costs.
Mutual Funds & ETF's
Combination of valuation of underlying assets
Risk: Medium to Low
Countries' macro-economic situation
Currencies, or Foreign Exchanges (FOREX) encompasses the currency markets. FOREX-investors are constantly switching their wealth from one currency into another. They usually leverage their positions in order to achieve greater returns at greater risks.
FOREX is driven by the value of one currency against another. If the European economy is doing better than the US economy, more goods will be bought in Euro. This increases the demand for Euros relative to US Dollars, and as a result the Euro will appreciate against the US Dollar.
It is possible to invest in commodities such as gold, copper, silver, palladium, etc. The value of those commodities is mainly driven by demand and supply. If demand is high and supply is low, the price will go up and vice versa. Take Lithium as an example: Because increasingly more Electrical Vehicles are produced, there is an increasing demand for Lithium, which has pushed the price strongly upwards over the past couple of years.
Demand and supply of the individual commodities
Venture investing is the practice of putting your money at work in new ventures. This encompasses mainly new companies, companies in need for capital expansion, or companies that are being taken over. Usually the required monetary input is high, but the investor usually gets some kind of direct control, allowing him to have a stronger impact on company results.
Since 2017, cryptocurrencies have gained enormously in public interest. Not surprisingly, since the technology behind cryptocurrency, called blockchain is a major technological innovation that is often compared to the internet in its early years. Cryptocurrencies are mined —that is— computers are creating cryptocurrencies by solving complex mathematical equations and the miners are rewarded. Although the technology most probably will have significant use in the near future, at this point the market for cryptocurrencies is primarily dominated by speculators. They are betting on price increases driven by demand and supply, rather than on the intrinsic value of the crypto's, which results in extreme volatility and risk for this asset class. To be continued.
Demand and supply