TYPES OF INVESTMENT PRODUCTS
Stocks or shares are issued by companies to raise capital or financing from investors.
A share represents a part-ownership of a company. For example, if you buy 10,000 shares in a company that has issued one million shares, you own one percent of that company.
Whether you say shares, equity, or stock, it all means the same thing.
Exchange Traded Fund (ETF) is a security that seeks to track or replicate performance of an underlying index, commodity or a basket of assets.
It provides investors access to a wide variety of markets and asset classes and it is listed and traded on a stock exchange.
For example, a popular ETF is the Straits Times Index (STI) ETF. The STI is the index that tracks the performance of the Singapore stock market as represented by the top 30 companies listed on it. So the STI ETF is a fund that replicates the aggregated return of those 30 companies.
Real Estate Investment Trusts (REITs) are property funds that invest in real estate assets to generate income for unit holders of the fund. REITs are classified by the type of properties they hold, such as commercial, industrial, retail, hospitality, logistics and residential properties.
The investment objective of REITs is to provide unit holders with dividend income, usually from rental income, and capital gains from the profitable sale of real estate assets.
Bonds are debt securities issued by borrowers such as governments or companies seeking to raise funds.
They are also known as fixed income securities because most bonds pay a steady stream of interest income throughout the life. Upon maturity, the issuer will redeem the bonds and pay bondholders the Face Value.
Key Features of Investment Products
Dividend and Capital Gains
Shareholders earn returns when they receive dividends and if they decide to sell their shares when the price of the shares gains in value. Dividends are paid out of the company’s profits. Not all the profits may be distributed. Companies may choose to re-invest profits generated from their operations into their business.
Shareholders have the right to vote in general meetings of the company, Shareholders can exercise control by electing the board members, who will oversee the major decisions and policies implemented by the management.
Shareholders have limited liability, in other words, their liability is limited to the amount of money invested in the shares of the company.
Investors achieve diversification in one single transaction with minimum investment versus having to build a similar portfolio by purchasing individual stocks, bonds or commodities which could require a huge investment outlay.
The costs of investing in ETFs are generally lower than actively managed funds (for example Unit Trusts) in the same market of assets.
ETFs offer access to a variety of local and global markets, as well as asset classes, both broad and specific; which may be inaccessible to individual investors.
Common categories of ETFs:
1. By country or market – eg. STI, Shanghai Stock Exchange 50, S&P 500, etc.
2. By market cap size – eg. large, mid and small cap
3. By type of assets – eg. bonds, commodities, dividend yielding, etc.
Assets of REITs (ie. real estate) are professionally managed and revenues generated (primarily rental income) are normally distributed at regular intervals as dividend to REITs shareholders.
REITs typically own multi-property portfolios, with diversified tenant pools. This reduces the risk of relying on a single property and tenant, which you face when you directly own a real estate property.
Compared to investing directly in real estate properties, REIT investment offers the significant advantage of liquidity – the ease of converting assets into cash. Because REITs are listed on the stock exchange, you can both buy and sell shares throughout the trading day, and in much smaller amounts compared to buying a physical property.
Predictable Income Stream
Investors know how much interest income they can expect to receive, and how often they’ll receive it. For bonds with maturity dates, investors also know when their principal amount will be repaid if they hold the bonds to maturity.
Lower Potential Returns
Due to the certainty of the payment streams, bonds are relatively safer than other asset classes. The potential returns on bonds in terms of capital gains are therefore lower as well.
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