Key Takeaways
Investment products have different features and risk characteristics
For more complex products, you will be required to undergo a knowledgeassessment or account review before they can be sold to you
An important aspect of investing is understanding the product before youput your money in it.
You might ask:
What are the product’s benefits, risks, limitations and transaction costs?
What is the maximum you can lose in a worst case scenario and how mightthis happen?
Will this product complement, supplement or replace your existing investments?
Will you become over-exposed to a particular risk if your portfolio isnot sufficiently diversified?
A Brief Introduction To Financial Markets
The primary market is where new issues of financial assets are sold. Examplesare Initial Public Offers (IPOs) for ordinary shares and tenders for governmentbonds.
The secondary market is where an investor can purchase an asset from anotherinvestor rather than the issuer. The Singapore Exchange (SGX) is an exampleof such a stock market, or stock exchange.
Different asset classes such as shares, Exchange Traded Funds (ETFs) andReal Estate Investment Trusts (REITS) are listed on the exchange. Thereare fixed trading hours during which the prices of the shares may go upand down.
Over-the-Counter (OTC) refers to trades made outside the organised exchanges.Brokers and dealers use a network of computers and telephones to determineprices between two parties.
What You Need To Start
To start investing, you will need:
A Central Depository (CDP) account to hold your securities
A brokerage account with a securities broker for trading
Common Investment Products
Types Of Investments | What It Is | What It Is Good For |
|---|---|---|
Shares | Shares are issued by companies to raise capital or financing from investors.When you buy a share in a company, you become a part-owner of that company. | Income from dividends. Capital gains if the share price rises. |
Bonds | Companies or governments can borrow money from investors by issuing bondsto raise funds. * Singapore Savings Bonds (SSBs)areamong the safest investments as they are backed by the Government. Youcan also redeem the bonds early without any penalties. | Regular stream of interest (the 'coupon'). Preserving your capital. |
Unit Trusts Or Funds | Investment product where money from investors is pooled and invested bya fund manager in a portfolio of assets. This is according to the unittrust or fund's stated investment objective and investment approach. | Achieve diversified investment exposure. |
Exchange-Traded Funds (ETFs) | A type of fund that is listed and traded on a stock exchange. Some ETFshave simpler cash-based structures while others are complex and involvederivatives. | Achieve diversified investment exposure. |
Real Estate Investment Trusts (REITs) | Unit trust or fund that is traded on a stock exchange and is investedin a portfolio of real estate assets. | Regular income from distributions. Better liquidity than investing directlyin properties. |
Not all products in a specific asset class are of the same quality.
For example, although bonds are often described as "safer", there arediffering quality of bonds out there. Some are rated as investment gradewhile others are of lower quality (i.e. junk bonds or "high-yield" bonds).
Same goes for stocks too!
Other Investment Products
Some products are more complex than others and have terms and featuresthat may be difficult to understand. These products are classified as SpecifiedInvestment Products (SIPs) in Singapore.
Before an SIP can be sold to you, financial institutions are requiredto assess your investment knowledge and experience to make sure you canunderstand these products.
This is done through a Customer Account Review (CAR) if you wish to openan account to trade SIPs listed on an exchange, or a Customer KnowledgeAssessment (CKA) if you wish to invest in an unlisted SIPs.
Note: Remember, do not invest in products you do not fully understand.
