Top Investment Opportunities
The financial world is full of opportunities to invest and potentially generate profit. However, with these potential rewards also come considerable risks, the nature of which can differ depending on the type of investment in question. Before getting started, it’s important for beginners to familiarise themselves with the different options and the risks involved.
In this guide, we’ve compiled a list of some of the top investment opportunities to potentially grow your wealth. We will explain each investing opportunity in detail and provide a list of advantages and disadvantages for each to help you get started.
The information in this article is provided for educational purposes only and does not constitute financial advice. Consult a financial advisor before making investment decisions.
Stocks and Shares
When people think of investing, stocks are often the first type of investment which comes to mind.
A company's stock represents an ownership stake in a company. Consequently, when investors buy shares in a company they are acquiring a portion of that business. The future value of that investment will be tied to the success, or failure, of the company in question.
The stock market represents a very broad investment opportunity, as you can purchase shares in companies from many different sectors and from economies all over the world.
Stocks offer the potential for high returns, particularly for those investing over the long-term. However, stocks are also associated with a high level of risk. If an investor picks the wrong company, they can lose some, or even all, of their initial investment.
Bonds
Bonds are a fixed-income instrument which are used by governments and corporations to raise funding.
Investors who buy bonds are essentially lending money to the issuing entity, which undertakes to repay the original amount, known as the principal, on a fixed date in the future.
In exchange for the loan, the issuing entity typically makes periodic interest payments, known as coupons, to the bondholder at a predetermined rate.
Bonds are typically viewed as a lower risk investment than stocks; however, the exact level of risk depends on the issuing entity. Government bonds tend to be less risky than corporate bonds, particularly if they are issued by a nation with a strong history of repaying debt, such as the US or the UK.
The risk level of corporate bonds depends on the company in question. Bonds issued by a company with a high credit rating are known as investment grade bonds and are lower yielding than junk bonds, which are issued by less creditworthy companies.
Mutual Funds
Mutual funds are a collective investment vehicle which pools investor capital to invest in a range of assets, not limited to stocks and bonds. Consequently, fundholders benefit from instant diversification with a single investment.
Mutual funds can be either passively or actively managed. A passively managed fund attempts to track the performance of an underlying index by replicating it.
For example, a fund which tracks the FTSE 100 would simply buy shares in the companies which make up the index, adjusting their holdings to account for index rebalancing.
However, many mutual funds are actively managed. That means that a management team is actively researching and constantly looking for opportunities in the markets.
Instead of attempting to track an underlying index, actively managed funds aim to outperform a benchmark index. However, in reality actively managed funds often underperform the wider market, particularly over the long term.
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds (ETFs) are similar to mutual funds. They too pool investor money to invest across a basket of assets and, consequently, also offer investors instant diversification.
Their main difference is how they are bought and sold.
When buying shares in a mutual fund, investors buy them from the fund itself, either directly or through a brokerage. Similarly, when investors wish to sell their shares, they are redeemed by the fund.
Transactions only take place once a day, typically after the market close, when share price is calculated based on the net asset value (NAV) of the fund’s holdings.
On the other hand, ETFs are listed on stock exchanges and, consequently, are traded in the same manner as stocks. This means investors can buy and sell ETFs throughout the trading day, providing more flexibility.
Whilst active ETFs do exist, they are typically associated with passive management, meaning ETFs often have lower fees than mutual funds.
Property
Real estate also represents an investment opportunity with a variety of approaches. Investors can rent out their investment property to earn additional income and also potentially benefit from capital gains in the future if property prices increase.
However, investing in property requires a large amount of capital up front. Many investors may need to borrow money to facilitate the purchase, meaning that any rental income will be offset to some degree by interest payments.
Furthermore, as with any asset, property prices are not guaranteed to rise; there are many factors, including economic downturns, which can lead to declining property prices. Falling property prices can be particularly problematic when the property in question is mortgaged.
Another big drawback of investing in property is its illiquidity. Whereas investments such as stocks and bonds can typically be converted to cash quickly and with relative ease, property sales can take months or even years.
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts, or REITs, provide investors with the opportunity to invest in property without buying physical real estate.
REITs are companies which use a pool of investor money to acquire or develop, and usually manage, a portfolio of income generating properties – such as apartment buildings, office blocks and warehouses.
Like stocks and ETFs, REITs are traded on exchanges, meaning investors can buy and sell shares throughout the trading day.
Companies which qualify as REITs enjoy preferential tax treatment; however, in order to do so, they need to meet certain criteria. One condition of acquiring REIT status is that they must distribute 90% of their tax-exempt profit to shareholders as a dividend.
Whilst this means REITs often have attractive dividend yields, it significantly restricts the amount of profit it can reinvest for future growth. This can result in low growth and higher levels of debt, as many REITs rely on borrowing for financing.
Commodities
Another example of a tangible investment opportunity is commodities, which can represent an interesting opportunity for those wishing to diversify portfolio.
The most popular commodities for investment purposes tend to be precious metals, particularly gold, which is often desired by investors during times of market turbulence thanks to its safe haven status.
However, there are a variety of other commodities to consider, including copper, crude oil and coffee to name but a few. Whilst commodities offer investors portfolio diversification and can be a hedge against inflation, their prices can be highly volatile.
Final Thoughts
Hopefully, after reading our article you have a better understanding of some of the top investment opportunities available to investors.
Remember that it is not necessarily a question of choosing just one type of investment. Many successful portfolios are diverse, holding a blend of different assets.
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Frequently Asked Questions
When should I start investing?
It’s generally agreed that the earlier you start investing the better, as it gives your investments more time to grow. However, before you start investing, it’s a good idea to make sure you have an emergency fund in cash to help cover any unforeseen events. Also, if you have any high interest debt, it makes sense to pay this off before you start investing.
How much money do I need to start investing?
Thanks to fractional shares, it’s possible to start investing with as little as $1.
What fees and costs should I expect when investing?
Naturally, this depends on what you’re investing in and who you’re investing with. When buying and selling stocks, bonds, REITs and ETFs via a broker, you may be charged commissions and spread fees. REITs and ETFs are also subject to annual management fees.
How to choose what to invest in?
Before you get started, it’s important to establish exactly what you are looking for from your investment as well as your risk profile, as both things will play a big part in what you choose to invest in.
When you’re ready to choose an investment, it’s important to conduct independent research. Make sure you fully understand what you’re investing in and the risks involved.
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