What are equities?

• Used interchangeably with “stocks” and “shares”, although not exactly the same.
• Equities represent ownership of a publicly traded company which entitles the owner of the stock to a proportion of the corporation's assets and profits equal to how much stock they own.
• Companies issue equity to raise capital in an initial public offering (IPO).

Figure 1: Different types of stocks

Source: OCBC Wealth Management

Some benefits of investing in equities

• Capital gains/growth: Equities can go up in value based on market movements.
• Earn dividends: The company distributes a portion of its earnings to shareholders.
• Relatively high returns: Potentially higher returns than bonds but also comes with higher risk.

The key risks of investing in equities

• Company-specific: The company may not produce enough revenue or profits and may fail to meet investors’ growth expectations.
• Economic and market uncertainty: Strong companies are not immune to volatility and adverse market news.
• Liquidity: Investors may face difficulty exiting thinly traded equity counters, such as certain small-cap stocks.

What are bonds?

• A bond is a loan that the bond purchaser or bondholder makes to the bond issuer (company).
• Like a loan, a bond pays interest periodically (or coupon) and repays the principal (face value) at a stated time, known as maturity.
• Usually interchangeable with, but is a subset of, fixed income.
• Debt issued by governments and corporations to meet their financing needs.
• Investors are paid an interest known as the coupon rate at specific intervals throughout the life of the loan, on top of the principal amount at maturity.

Figure 2: How bonds work

Source: OCBC Wealth Management

Sources of return

1. Periodic coupon payments
2. Any capital gain (or capital loss) when the bond matures or is called back or sold
3. Income from reinvestment of the periodic coupon interest

Some benefits of investing in bonds

• Predictable stream of payments: Provides recurring income and repayment of principal at maturity.
• Lower risk compared to shares: In the event of liquidation, bondholders will get paid before equity shareholders.
• Higher rate of return: More than most saving accounts and fixed deposits of comparable tenure.

The key risks of investing in bonds

• Credit risk: If the issuer goes into default, the future coupon payments and the entire principal may be at risk.
• Interest rate risk: Bond prices and interest rates are negatively correlated; when interest rates rise, bond prices will fall.
• Foreign currency (FX) risk: This exists for bonds that are denominated outside of the customer’s base currency.

What are the various types of real estate?

• Residential (e.g. apartments, houses)
• Commercial (e.g. shops, office spaces)
• Industrial (e.g. factories, warehouses)
• Land

Some benefits of investing in real estate

• Recurring income stream: This comes in the form of rent.
• Scarcity: This provides capital appreciation and hedges against high inflation.
• Use of leverage: Allows investors to start with a relatively smaller outlay.

The key risks of investing in real estate

• Liquidity risk: Difficult to sell off within a short period of time without selling below market value or at a loss (with the exception of Real Estate Investment Trusts).
• Vacancy risk: High vacancy rates can lead to negative cash flow if rental income is insufficient to cover the cost of mortgage, maintenance, etc.
• Interest rate risk: Interest rate risk: Real estate investments tend to be financed with loans, thus exposing investors to the risk of higher interest rates.

What are commodities?

• Commodities are raw materials used in the production of other goods or services and are typically categorised into hard and soft commodities.
• Hard commodities are natural resources that are mined or extracted from the earth.
  • Energy (e.g. crude oil, natural gas)
  • Industrial metals (e.g. copper, nickel, iron ore)
  • Precious metals (e.g. gold, silver, platinum)
• Soft commodities refer to commodities that are grown and reared.
  • Agricultural (e.g. coffee, wheat, rice)
  • Livestock (e.g. hogs, chickens)

Some benefits of investing in commodities

• Diversification: Low correlation to stocks and bonds helps to lower portfolio volatility.
• Inflation hedge: Commodity prices typically rise alongside the prices of goods and services due to their limited quantities.
• Potential returns: Growing demand for a commodity can result in its prices rising significantly over time.

The key risks of investing in commodities

• Political risk: Cross-border sanctions may disrupt the supply and/or demand of commodities, causing unexpected price changes.
• Market risk: External factors such as natural phenomena can abruptly alter the prices of commodities, causing your investment to lose value.
• Foreign currency risk: Many commodities are priced in US dollars and thus influenced by the relative strength/weakness of your local currency against the US dollar.

What is FX investing?

• The foreign exchange market (FX or forex) is where currencies are traded.
• For multinational companies, this market provides a means of doing business in other countries, facilitating the payment of bills in the local currency.
• For speculators, this market provides opportunities to take advantage of movements in exchange rates.

Some benefits of investing in FX

• Capital appreciation: Profit from the rise in the value of a currency if your view of global market events is correct.
• Hedge against political and event risk: Currencies can be played against each other based on your tactical assessment of important events going on around the world.
• Diversification: Investing in different currencies can diversify your portfolio, particularly if your portfolio is heavily focused on assets denominated in a single currency such as the US dollar.

The key risks of investing in FX

• Volatile: Critical world events can happen in an instant without warning, subjecting currencies to significant short-term volatility.
• Interest rate risk: If a country’s interest rate rises, its currency tends to strengthen; if its interest rate falls, its currency tends to weaken.
• Currency pegs: In many developing countries, exchange rates are fixed to a world leader such as the US dollar. In this circumstance, central banks must sustain adequate reserves to maintain a fixed exchange rate. If there are frequent deficits in payment, the developing country’s currency may face significant devaluation.