Financial Instruments for Investing

Cash & Cash Equivalent Investment Instruments

For novice investors there are following options:

1. Physical cash is easy to be stolen and does not give you any return. Worst case you forget where you put it. In the age of online payment and credit cards you should have as much cash as you need with you but not more. Maybe if you travel some cash as a backup.
2. Money in the bank account is the less risky possibility to invest. However, the interest rates are very low currently and inflation is picking up. You should always have some money in the bank in case of emergencies and upcoming investment possibilities, but you will not increase the value of your portfolio by putting your money on the bank account.

For investors with investment experience in private context there are some more alternatives:

1. Short Term Governmental Bonds are bond issues with by the government and have a very short due date, e.g. 30 days. Therefore they are nearly as liquid as cash.
2. Short Term Bond Funds are funds that invest in bonds, which have a very short due date, e.g. 30 days. Therefore they nearly are as liquid as cash.
   Treasury bills (or T-bills) are similar to bonds that do not pay interest prior to maturity. Therefore, they are sold at a discount of the par value. They are issued directly by the US and UK government and mature in one year or less.

Bond Investment Instruments

For novice investors there is following option:

• Bond ETFs (Exchange Traded Funds) have low transaction costs and are well suitable if you want to invest in bonds.

For investors with experience in private context there are some more alternatives:

• Bond Funds are funds that invest in bonds, which have a due date of more than 30 days.

Investors with experience in a professional context can also invest in:

• Single Bonds, but as there are many different sorts of bonds, we suggest to buy established bonds of companies and governments, if you are not an expert.
• Bond options are a derivative that gives the buyer the right (but not the obligation) to buy the bond at a later point of time at a previously defined price.
• Bond futures are futures that use bonds as an asset.
• Bond CFDs are CFDs that contain Bonds in the contract.

For Full-time professional Investors there are some more instruments out there:

• Bond Swaps are Swaps where bonds are exchanged.
• Bond Hedge funds are hedge funds that invest in bonds.

Equity Investment Instruments

For novice investors there are following options:

• Stock funds are funds that invest in stocks. Stock funds are an easy alternative to buying several single stocks however management fees will occur that will reduce your returns.
• Equity ETFs have low transaction costs and are well suitable if you want to invest in stocks. This is our pick if you want to take advantage of low transaction fees but have the full potential of the stock price increase. However you do not owe the stock itself, therefore you have to make sure that the ETF is physical and that you will benefit from dividends.

For investors with experience in private context there are some more alternatives:

• Single Stocks are fractional ownerships of a corporation. If you buy single stocks please make sure that you buy different ones to diversify and reduce the risk. Stocks of large caps are usually safer than the ones of small caps and offer the possibility of good gains if you are able to assess the current market conditions correctly.
• Stock CFD (Derivative) are CFDs that contain stocks in the contract.

Investors with experience in a professional context can also invest in:

• Stock Options (Derivative) are derivatives that give the buyer the right (but not the obligation) to buy the stock at a later point of time at a previously defined price.
• Stock Futures (Derivative) are futures which use stocks as an asset.
• Stock Swaps (Derivative) are Swaps where stocks are exchanged.

Full-time professional Investors can also invest in Stock Equity Hedge funds. Stock hedge funds are hedge funds that invest in bonds. Hedge funds are not open to private investors, you need to be a full time professional.

Real Estate Investment Instruments

When you want to invest in real estate, you should bring some experience. There are two main options to invest in real estate:

1. Owning your own property, where you own and manage the property. This comes with a lot of work but you are the boss!
2. Investing in a real estate investment trust (REIT), meaning giving money to companies to develop real estate that returns profits for you.

When you want to own your own property, you have the following options:

Cash financing usually only makes sense if you don't know where to put the money elsewise. You want to have a safe income and you are not much concerned about the rate of return

Building Loan: When you get a loan for real estate you have the huge advantage of leverage. Financing real estate through a lone gives you a high return on the capital employed as you can use the loan to leverage your own money. 

Let’s explain this with an example. When you buy stocks worth 100.000 USD, your gains will be counted as a percentage of the 100.000 invested. When you put 100.000 USD in a house and get a credit worth 900.000, your profit is made in relation to 1.000.000 USD but you only put in 100.000 USD. The security is the house, therefore the bank will give you the loan. The bank will not give you a loan if you just invest in stocks as there is no security. 

For sure this investment comes with a lot more work than buying stocks! Think well about it! It is a great option if you are willing to put extra effort. Also, you will need a good credit statement and some initial amount of money.

Housing savings contracts give you support from your government if you put in some money. This makes especially sense when you are young or if you want to create savings for your children.

Furthermore, you will have to decide on which kind of real estate you will invest:

• Residential real estate investments, where the income comes from the rent of the people who live in the real estate
• Commercial real estate investments, where the income comes from the rent of the companies that rent the office space
• Industrial real estate investments, where the income comes from the rent of the companies or the people that use the space, e.g. warehouses, distribution centers or manufacturing or assembly plants
• Retail real estate investments, e.g. shopping malls where the income comes from the rent of the shops
• Mixed-use real estate investments, where there is some of the above mentioned combined, e.g. a residential area with office space and shops.

Commodity Investment Instruments

Novice investors should not focus on commodities. 

Investors with experience in a private context can go for a physical purchase of commodities. Gold is the most popular commodity, but you can also invest in silver or other metals. Gold is very liquid and many countries offer tax advantages on returns made. 

Unfortunately in the US capital gains made with physical commodities are taxed at 28 percent. If you go for more complex commodities you should really be familiar with the commodity.

For investors with experience in a professional context there are some more alternatives:

• Commodity Certificates (Derivative) are derivatives that have a commodity as underlying.
• Commodity Options (Derivative) are derivatives that give the buyer the right (but not the obligation) to buy the commodity at a later point of time at a previously defined price.
• Commodity Futures (Derivative) are futures which use commodities as an asset.
• Commodity Swaps (Derivative) are swaps where commodities are exchanged.
• Commodity CFD (Derivative) are CFDs that contain commodities in the contract.

For full-time professional Investors there are Commodity Hedge funds. Commodity Hedge funds are hedge funds that invest in commodities. Hedge funds are not open to private investors, you need to be a full time professional.

Modern Investment Instruments

We do not suggest anyone to go into modern investments if they are not willing to take the full risk of losing the whole investment. If you are willing to take the risk, you can go into:

• Crowdfunding gives you the possibility to invest in new ideas or companies. However, there is a huge risk the company will not turn profitable and all your money is lost.
• Digital Token/Cryptocurrencies are on the market for a couple of years and have seen a hype in recent years. There is no regulation and the companies usually do not even have a proper legal form. Investments are of high risk.

There are probably a million other investment possibilities in the niches of the internet, e.g. you can invest in digital property in the game of second life. If you are an expert in one of these and you want to take some risk, you are free to do so. However, this is not part of a profound long-term investment strategy.

Passion Investment Instruments

You are best in what you love doing! Investing in what is your passion can be very rewarding. You can use your special knowledge and combine it with making money. 

Also, it gives a good diversification. The downside is, that you must know what you are doing as you might fall for frauds and fakes or hidden costs. 

To name a just a few, Passion investments include:

• art
• classic cars
• watches
• wines
• instruments
• jewelry
• antique furniture

The Knight Frank Luxury Investment Index gives an overview of possible passion investments. Over the last years especially wines and cars showed great performance. However, your investment should depend on your knowledge! The following graph shows an analysis of the past years on passion investments.

Summary

In the following, we give you a summary of the different asset classes:

The more experience you have, the more specific your investments can be. Investors with little experience should stay away from specific investments and should diversify, e.g. through funds or ETFs. Investors with more experience can focus their portfolios. The investor should always keep the costs in mind and reduce them as much as possible.