Discover Your Investment Options

When starting out in the world of investing, it is important to understand the different types of investments available.

Discover Your Investment Options

 Article Last Updated: 3 February 2021

Five different pggy banks, indicating a diverse share portfolio
Image Source: Getty Images

People seeking to invest have a wide range of options from which to choose. There are many types of investments that can provide varying returns over time. Furthermore, different types of investments also come with varying characteristics and risk profiles. This means that certain types of investments may better suit specific investors, depending on their stage of life and risk tolerance. Many investors choose to invest in a range of investment classes, and a variety of investments within each class. For example, an investor may own multiple ASX shares as well as other investments such as property or bonds.

Types of investments

When starting out in the world of investing, it is important to understand the different types of investments available. Investments can broadly be classified into the following classes: 

  • Australian shares: shares represent part ownership of a company. When you buy shares in companies traded on the Australian Stock Exchange (ASX), you are entitled to receive any dividends those companies may distribute. You may also benefit from capital gains if the prices of the shares you own increase over time. 
  • Global shares: there are multiple share exchanges across the globe. The ASX represents just a small percentage of the universe of investable shares. Many investors like to seek global exposure through investing in shares traded on exchanges such as the NASDAQ, New York Stock Exchange (NYSE), and other global stock exchanges. 
  • Property: property can be residential, commercial, or industrial in nature. A property investment could be in the form of bricks and mortar assets, like your home or an investment property. It’s also possible to gain exposure to property investment by buying units (or shares) in real estate investment trusts (REITs). REITs are organisations which own and operate income producing properties, such as office buildings and shopping centres. They aim to increase the value of their property assets and generate rental income, part of which is usually distributed to their securityholders.
  • Fixed interest: also known as bonds, fixed interest securities represent a loan made by the investor to the bond issuer (who could be a company or government). Fixed interest securities give investors the right to interest payments, which may be fixed or variable, and to repayment of the principal at the bond’s maturity date. Like shares, bonds are traded on bond markets globally.
  • Cash: cash can be cash in the bank or actual physical cash. With interest rates at record low levels, many investors are looking to alternative asset classes given the current poor returns available on cash investments such as term deposits.

These investment classes each have different characteristics and, as such, will suit different categories of investors with varying risk profiles. It is important to understand your investment options so you can select the investment types most likely to help you achieve your financial goals. Shares (whether Australian or global) are seen as a higher risk investment, suiting investors with longer-term time horizons. This is because over the short term share prices can be volatile. Over the longer term, however, shares tend to provide a higher return than lower risk investments, such as cash. Fixed interest securities are lower risk than shares, but still entail some capital risk, as the price of bonds can fluctuate with interest rate and credit risk changes. The payments received by bondholders may also change if the bonds have a variable interest rate. 

Property is generally considered a longer-term investment. Partly this is because there can be high entry and exit costs to property investment. When buying bricks and mortar property, investors must also consider the costs of stamp duty, conveyancing, and other buying and selling costs, which can be substantial. This is less of a problem when investing in property via REITs, units of which can be bought and sold on the ASX like other shares. Nonetheless, these trusts tend to give exposure to commercial or industrial property rather than residential property. 

Defensive or Growth

Different types of investments can be classified as defensive or growth investments. Defensive investments tend to be more stable and less likely to lose money, however returns on defensive investments tend to be lower over time. Growth investments have higher expected returns, but the risks of losing money can also be greater, especially over the short term. Defensive investments tend to pay fixed returns, whereas the returns from growth investments (such as dividends from shares) can grow over time. 

Let’s take a look at some characteristics of these different types of investments:

Asset Class Asset Type Time Frame Risk Level
Australian Shares Growth 5 - 7 years High
Global Shares Growth 5 - 7 years High
Property Growth/Defensive 5 -10 years Medium
Fixed Interest Defensive 1 - 3 years Medium
Cash Defensive 0 - 3 years Low

 

As you can see, different types of investments suit different time horizons and risk profiles. Cash and fixed interest are the most common defensive investments. This is because they involve a commitment to return capital to the investor at a certain point in time. Shares are the most common type of growth investment, as shares can pay dividends and appreciate in value over time. Having said that, shares themselves also offer a wide variety of choice for investors with differing risk appetites and expectations of returns. Property can combine aspects of both growth and defensive investments - it can provide a stream of rental income, while also potentially increasing in value over time.

Australian shares

Investors have a wide variety of choice when investing in Australian shares. There are more than 2,000 companies listed on the ASX which means there is something suitable for all types of investors. From big name companies like Rio Tinto Limited (ASX: RIO) and Commonwealth Bank of Australia (ASX: CBA) to a wealth of smaller-cap growth shares, the ASX contains a vast array of investment opportunities. Some investors enjoy researching individual ASX shares and taking a position in those they see as promising. Others are simply seeking exposure to the market more broadly. For the latter, there are a variety of exchange-traded funds (ETFs) available which aim to reflect the wider ASX or specific sectors of the market. 

Companies listed on the ASX operate across a diverse range of industries, including everything from mining, retailing, financing, and technology, to healthcare and manufacturing. Most Australians will have some exposure to ASX shares via their superannuation funds, but many are also choosing to invest on their own to help achieve their financial goals. For investors who are just starting out, it is essential to remember that Australian shares are generally a longer-term investment and share prices fluctuate day to day. This is one of the reasons it’s so important to diversify by spreading your investments across multiple types of shares. It’s the ‘don’t put all your eggs in one basket’ principle.

Global Shares

Australian investors also have the option to invest in global companies like Apple Inc (NASDAQ: AAPL) and Google owner Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL). This can be done directly using online brokerages, or via ETFs traded on the ASX. Investing in global shares offers diversification benefits by giving investors access to the performance of companies worldwide. Many of the world’s best companies are listed on stock exchanges outside Australia, so limiting your investment universe to Australia means you would miss out on exposure to them. Investing globally also provides geographical diversification, providing exposure to industries that are underrepresented in Australia. Diversification can help reduce losses in bad times and provide more opportunities to benefit in good times.

Different Types of Shares

There are different types of shares traded on the ASX and other global stock exchanges. The majority of traded shares are known as ordinary shares, which carry no special rights. Ordinary shareholders generally have the right to vote at a general meeting of shareholders, receive dividends, and share in any distribution of assets in the event the company is wound up. Preference shares, on the other hand, give holders a priority to dividends and distributions upon the winding up of a company. Contributing shares (also known as partly paid shares) are issued without the company requiring payment of the full issue price. The company is then entitled to call for the outstanding part of the issue price at a later date (or dates).  

Investors can also purchase options over shares. Options allow the holder to either buy or sell shares in a company at a certain price within a certain timeframe. A call option allows the holder to buy shares at a specified price within the specified timeframe. A put option allows the holder to sell shares at the specified price within the specified timeframe. The price of an option will depend on the price of the underlying share. Options can be used both to speculate on price movements and to hedge existing positions. Options can, however, be high risk, so they are not usually recommended for beginner investors.

How to decide which investment options suit you

So how do you choose your investments? Firstly, you need to understand your financial goals and time horizon. Secondly, you need to understand your investment options. As discussed, different types of investments will suit different people depending on their risk tolerance, desired return and willingness to pay any costs associated with the investment. For a risk averse investor interested in achieving some income whilst preserving their capital, fixed interest investments may be appropriate. For someone with a long time horizon and high risk tolerance who is looking for growth, global or ASX shares may be a more appropriate investment option. 

When it comes time to choose your investments it is worth researching the different types of investments available. You will then be well positioned to select the investment options that are best suited to you and your individual financial goals. Remember to spread your investments across different asset classes and different assets within classes. This will reduce the risk of your overall investment portfolio and provide you with more opportunities to benefit when things go well.

Figures correct at 3 February 2021. Kate O'Brien contributed to this report and on 3 February 2021 owns shares of Apple and Rio Tinto Ltd. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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