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Reading time: 6 minutes
There are many kinds of investments out there, each with its own level of risk and return.
The higher the potential return, the higher the risk that we might not get all our money back. So it’s good to have a mix of different investment types to spread risk and get the results we want. And it's important to do our homework and get investment advice so we understand the risks before handing over our money.
In this guide, we take a brief look at the most common kinds of investments, as well as a few of the lesser-known ones.
Savings accounts with New Zealand’s major banks are one of the most common and least risky ways to store money for the short term. Credit unions and building societies also offer savings accounts.
When we deposit money in an account we are actually lending it to the bank, which pays us some interest in return. The interest rate is relatively low, so savings accounts are not the best option for long-term growth. Find out more in our guide to bank savings.
Like savings accounts, term deposits also pay interest. The difference is that we agree to lend money to the bank for a fixed period of time such as 6 or 12 months, in return for a higher rate of interest.
Sometimes we can’t withdraw the money during the term of the investment. In other cases we can, but we get paid a lower rate of interest. Term deposits are sometimes called ‘fixed interest’ investments. Find out more in our guide to term deposits.
A bond is like an IOU issued by a government, council, or company. We lend them money for a number of years, and they promise to pay a certain interest rate – called a coupon. The level of risk involved when investing in bonds depends on whoever’s issuing them.
Unlike term deposits, we can sell bonds early. However, the price we will get can go up and down. Bonds are also sometimes called fixed interest investments. Find out more in our guide to bonds
When we buy a share, we’re buying a small part of a company. If that company makes money, we may be paid a share of the profit, called a dividend. Like house prices, share prices are generally expected to go up over time and give a ‘capital gain’ on our money when we sell. However, prices can fall in value as well. Find out more in our guide to shares.
Most investors should aim for a mix of investments to smooth out the ups and downs in value that typically happen
Returns from investing in property come from rental income and from any increase in the value of property over time – called capital gain. Some people view their own home as an investment because it may grow in value; however, it doesn’t bring in the income that letting property to other individuals or businesses does. It is also important to factor in the interest paid on a mortgage when assessing the potential for capital gain. We can invest in commercial property directly, or through managed funds. Find out more in our guide to property investment.
A managed fund is a financial product that buys a number of shares and other investments such as property, term deposits and cash. The buying decisions are made by expert managers. KiwiSaver is an example of this investment type. All of us in KiwiSaver are already investing in a type of managed fund.
When we buy units in a managed fund we are spreading our savings across a range of shares or other investments within the fund. That means that our money is 'diversified’ and our eggs aren’t all in one basket. Find out more in our guide to managed funds
Alternatives is a broad term often used to describe types of investments that fall outside the standard asset classes of cash, bonds, shares and property. Alternatives include commodities, currency and derivatives.
These types of investments don’t pay interest or dividends, but do increase and decrease in value, which can result in a capital gain. The value of commodities often moves in the opposite direction of other asset classes (e.g. when share prices go down, gold often increases in value, and vice versa), so investors sometimes buy them to try to protect their money.
As well as being used to buy goods and services, foreign currency is also used as an investment. Currency investors are looking for higher interest rates overseas, or hoping exchange rates will move in their favour resulting in a capital gain. Investors, including managed funds, may also use currency to protect, or ‘hedge’, other investments that are invested overseas. The Financial Markets Authority has more information about forex trading.
Derivatives are generally only used by more sophisticated investors, such as managed funds. This can be a confusing and complex area of investing. However, derivatives are built on a fairly simple concept - allowing people to protect themselves, or ‘hedge’, against future price movements. For example a farmer can fix the price today, for the milk they will supply in the future. While at the same time, a supermarket owner can fix the price now for the milk they will receive in the future.
Professional investors still use derivatives for this purpose, but can now also use them to invest more efficiently.
Other alternative investment types can include things such as private equity, hedge funds, fine wine, exotic cars and stamps. There are different reasons for buying each one, but, as with all investments, their value can go up or down.
Investing by lending our money on a peer-to-peer lending platform or participating in equity crowdfunding are other ways of investing and earning a return. The Financial Markets Authority (FMA) has more information and peer-to-peer lending.
Capital notes, perpetual subordinated notes and other hybrid securities have some features of both bonds and shares. They're often issued by well-known banks, but they are generally riskier and may not be suitable for many. Here’s more about capital notes from the FMA.
Head to our guide on finding out your investor type. Knowing what type of investor you are will help you understand which investments are best suited to your goals.
Guide
Einstein called it the ‘eighth wonder of the world’. He was talking about compound interest, which supercharges our savings and investments. But it can also increase the cost of our debt. Either way, over the long run, we’re talking serious dosh!
The best compounding happens when any interest we earn gets reinvested and earns even more interest. It’s interest earning interest, and our money is working for us instead of us working for it!
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Guide
Instead of investing directly and doing it all ourselves, we can invest in a managed fund where our money is pooled with other investors’ money and spread across different kinds of investments. A fund manager chooses the investments, and each investor owns a portion of the total fund.
Managed funds can be a great way for beginners to wade into the waters of investing, as it doesn’t take much to get started. They also make it easier to manage risk by spreading our investments across a range of assets and products. KiwiSaver is a good example.
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Guide
To be successful with investing, it’s important to figure out what type of investor we are, which is sometimes called our “investor profile.”
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Guide
Investing is all about buying things that put money back into our pockets. Sound intimidating? It’s really not. Those of us who have a bank term deposit or are in KiwiSaver – we’re already investors!
We become investors when we put our money into things (assets) that can earn income or grow in value. The general aim is to earn a return that’s greater than any fees, taxes and inflation.
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Guide
Simply put, net worth is the difference between the value of what we own and the total amount that we owe. Why does it matter? It’s one way to tell if we’re really getting ahead.
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Guide
Not just anyone can call themselves a financial adviser. They have to meet a certain standard of competence and put your interests first.
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Guide
At Sorted, we’re keen to see you getting ahead financially and growing your money for the long term. Now generally,…
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Guide
When we buy a share, we're buying a small part of a company and a share in any profit the company makes. We can buy shares directly or own them through a managed fund like KiwiSaver.
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Guide
Savings accounts and term deposits with a bank, credit union or building society are convenient for saving.
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Guide
Lots of New Zealanders own rental property – it has been a popular form of investment over the years. The difference between an investment property and our own home is that we earn an income from it. Returns from property investment come from rental income and from any increase in the value of property over time.
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