Financial investments: what are we talking about
A financial investment is a vehicle that allows money to be invested in various assets with the aim of growing one's capital over the long term. These vehicles can include stocks, bonds, investment funds, real estate, and even precious metals or works of art. There are thousands of them, each with their own characteristics. Suffice it to say that the choice can quickly become complicated, including for those who are used to them.
The main goal of these investments is to generate regular income or capital gains, while diversifying risks to protect the invested capital. Financial investments indeed vary in terms of risk and potential return, and often require a good understanding of financial markets, as well as careful and thoughtful management. They are an essential means for individuals to plan their financial future, whether it be to finance personal projects, prepare for retirement or simply protect their assets from inflation and economic hazards.
Therefore, be careful! Most financial investments come with risks that are important to measure to avoid disappointment: they all involve more or less significant risk of total or partial loss of the invested capital.
Let's take a look at the most traditional options.
Stocks: the stars of the stock market
Definition and Types of Stocks
Stocks are most of the time traded on the stock market. They represent ownership shares in a company. They are divided into common and preferred stocks. Stocks grant a voting right at shareholders' general meetings and a right to dividends. They can be of different types: common or preferred, which grant additional rights or benefits.
How to Buy Stocks?
To buy stocks on the stock market, you can go through an online brokerage platform, a bank, or a financial advisor. It is crucial to research the companies in which you want to invest and diversify your portfolio.
Risks and Advantages of Stocks
While stocks can offer high returns, they also come with significant risks. Stock prices can fluctuate greatly depending on the company's performance and general economic conditions. Capital losses are therefore possible. Similarly, it should be noted that liquidity (that is, the ability to sell) can be more or less guaranteed depending on the market on which the security is listed. While there are no apparent problems for large companies, emerging companies can be more problematic. It's up to each individual to balance their risk!
Real-Life Example: Investing in a tech startup could provide impressive returns if the company is successful. However, there is also a risk of total loss if the startup fails.
Bonds: lending money to a company or a state
What is a bond?
A bond is a debt instrument whereby an investor lends money to an entity (usually a company or government, or even a local authority) that borrows the funds for a defined period at a fixed or variable interest rate.
Types of Bonds
There are several types of bonds, including government bonds, corporate bonds, and municipal bonds. Some offer regular returns (the payout of a "coupon"), others provide only the repayment and interest at maturity. Each type of bond has different characteristics and risk levels.
How to invest in bonds?
Bonds can be purchased through securities brokers, banks, or online platforms. They are often used to diversify a portfolio and reduce overall risk. Crowdfunding platforms also offer financial arrangements for purchasing bonds. In this case, they do not fall under the stock exchange and are more difficult, or even impossible, to resell.
Risks and Benefits of Bonds
Bonds offer advantages such as regular income, relative safety compared to stocks (although the capital is not guaranteed!), risk diversification, repayment priority in case of issuer liquidation, and a potential capital gain if interest rates decrease. However, they also come with risks, including interest rate risk (their value decreases when rates increase), credit risk (possible default of the issuer), and reinvestment risk (difficulty in reinvesting coupons at equally attractive rates). The issuer may also never repay in case of a problem!
Practical example: Buying French government bonds can provide increased security compared to stocks, but if interest rates rise, the value of your bonds can decrease.
Investment funds: investing in a basket of financial securities has
Mutual Funds (FCP and SICAV)
Mutual funds pool money from many investors to purchase a variety of securities, such as stocks and bonds. This allows investors to diversify their portfolio without having to buy each individual security. Each offers a different investment strategy, with the payment or non-payment of interest (distribution or capitalization funds).
Practical example: Investing in a mutual fund can allow you to have a share in several large companies without having to directly purchase each stock.
Index Funds and ETFs
Index funds and ETFs (exchange-traded funds) track the performance of a specific index. They are often less expensive than actively managed mutual funds and can offer instant diversification. They are tradeable on the stock exchange and can also pay interest. Each also adopts a different strategy. Better do your research!
Private Equity Funds
Private equity involves investing in private companies not listed on the stock exchange. These investments can offer high returns but are generally riskier and less liquid than traditional investments: they are difficult to resell.
Investment funds offer benefits such as diversification (reducing risk by investing in a wide range of securities), professional management (benefiting from the expertise of fund managers), and accessibility (allowing small investors to access various markets). However, they also carry risks, including management fees (which can reduce returns), market risk (fund values fluctuate with financial markets), and underperformance risk (managers may fall short of return objectives). In other words, it's possible to lose the invested capital.
Real estate: the reassuring aspect of stone
Direct Real Estate Investment
This is a favorite among the French. Direct real estate investment involves the purchase of residential or commercial properties to generate rental income or benefit from value appreciation. It offers benefits such as regular income generation through rents, potential long-term value appreciation, and investment portfolio diversification. However, it also carries risks, including rental vacancy risk (lack of tenants and hence rents), property maintenance and management costs, sensitivity to real estate market fluctuations, and limited liquidity (selling properties can be lengthy and complex).
Real Estate Investment Trusts (REIT)
REITs allow investors to buy shares in real estate properties managed by a management company. This provides exposure to real estate without having to manage the properties oneself. These assets offer advantages such as risk pooling (investment in a diversified portfolio of real estate properties), professional management (properties are managed by experts), and potential regular income in the form of dividends. However, they also carry risks, including real estate market risk (fluctuation in property values), liquidity risk (reselling shares can be difficult), and management fees (which can reduce returns).
Real Estate Crowdfunding
Real Estate Crowdfunding allows investors to finance specific real estate projects alongside other investors. This option is often akin to bond investing, as savers come to lend money to a project carrier. This investment presents advantages such as accessibility (allowing small investors to participate in real estate projects), diversification (possibility of investing in various projects), and the potential for high returns. However, it also carries risks, such as default risk (failure of the project or developer), liquidity risk (difficulty resale shares before the end of the project), and dependence on the performance of the real estate market (fluctuation in prices and rents).
Alternative investments: passion, at your own risk
Precious Metals
Precious metals, such as gold and silver, are often regarded as a hedge against inflation and a store of value. They offer benefits such as protection against inflation (their value tends to increase with inflation), portfolio diversification (low correlation with stocks and bonds), and a safe haven during periods of economic uncertainty. However, they also carry risks, including price volatility (the prices of precious metals can fluctuate sharply), the absence of regular income (they do not generate dividends or interest), and storage and security costs. Yes, those who buy gold are delivered a few grams of gold! It is also possible to invest in these assets indirectly through certificates or ETFs, but these supports are even riskier as the investor does not then own the precious metals.
Cryptocurrencies
Cryptocurrencies, like Bitcoin and Ethereum, are decentralized digital assets that offer high return opportunities but with significant volatility. They offer portfolio diversification (different from traditional assets) and a lack of control by traditional financial institutions that appeals to some investors. However, they also carry significant risks: they remain highly speculative and their value is not based on any real economic value, which causes them to fluctuate at impressive levels. There is also the security risk (hacking and loss of private keys), the absence of regulation (which can lead to fraud), and legal and tax uncertainty in many countries.
Investment in Art and Collectibles
Investing in art and collectibles can offer high returns and additional diversification, but requires a deep understanding of the market and a precise evaluation of the items. It has advantages such as portfolio diversification, the potential for long-term value appreciation, and the aesthetic or emotional pleasure of owning pieces of art. However, it also carries significant risks, including limited liquidity (difficulty to quickly resell), high transaction and maintenance costs (insurance, preservation, restoration), and the risk of counterfeiting or fluctuations in the art market trends.
The different investment strategies
There are many other investment strategies that exist, they should be evaluated based on your budget and goals, as well as your risk aversion. Here are 3 areas to explore:
Diversification
Diversification involves spreading your investments across different assets to reduce risks. By investing in various asset classes, you can protect your portfolio against market fluctuations.
Risk Management
Risk management involves understanding the risks associated with each investment and implementing strategies to mitigate them. This may include asset allocation, diversification, and the use of financial products to hedge risks.
Long-term vs Short-term Investment
Investment strategies can vary according to the time horizon. Long-term investment focuses on capital growth and stability, while short-term investment aims to take advantage of market fluctuations to make quick gains.
3 tips for successful investing
1. Analyzing Your Financial Goals
Before investing, it is important to clearly define your financial goals, whether it's preparing for your retirement, buying a house, or generating passive income. These will determine your investment strategy.
2. Choosing the Right Investments
Choosing the right investments requires thorough research and an understanding of the different financial products available. The task is tedious, so don't hesitate to seek information and consult various sources. It's also important to diversify your portfolio to reduce risks and maximize returns.
3. Monitoring and Adjusting Your Portfolio
It's crucial to regularly monitor your portfolio and adjust your investments based on performance and changes in your financial goals. This may involve selling underperforming assets and reinvesting into more promising opportunities.
