5 Investment and Financial Instruments You Need to Build Your Investment Portfolio in Ghana

Asset classes are the different categories that investments and financial instruments are grouped into. The concept of asset classes is very important to understand because it allows one to really ascertain what to invest in, while taking into account income levels, risk tolerance, and investment goals.?

Historically, there have been 3 main asset classes: equities (stocks), fixed income, and cash equivalents (money market instruments). However, more asset classes have been designed to adapt to the sophistication and opportunities of finance and investment.

Some of the other more common asset classes are real estate, commodities, derivatives, foreign currencies, and cryptocurrencies.

Let’s take a look at some asset classes you should definitely know:

1. Equities

Equities, which are also known as stocks, represent ownership of a company. Essentially, if we speak of equities, we are talking about one’s ownership of a company which earns the person certain rights to the company. Owning a share (equity) of a company allows you to earn dividends (a share of the profit of the company).?

There are two main ways to invest in equities; you either invest in a public company or a private one. A public company is simply one that is listed on the stock exchange while a private company isn’t listed on any stock exchange. The shares of both company types have different characteristics, as well as pros and cons depending on who is investing. The main focus of this article is to explain what equities (shares) are.?

The performance of equity (share) is influenced by quite a number of variables, and as such, before you invest in any equity (share), it is imperative to speak to an adviser or broker. A key lesson to understand about investing in equities is that the benefits are seen best when you invest over the long term.

2. Fixed Income

Fixed Income refers to investments that pay investors a fixed interest or dividend payments until maturity. Upon maturity of a fixed income investment, investors also receive the principal they invested. Typical examples of fixed-income investments are government and corporate bonds. Fixed incomes are also considered a relatively safe kind of investment, especially for risk-averse investors.?

One of the key benefits of a fixed income is the consistent dividends or interest earned on the fixed income investment, which can be used to meet arising needs. Another important thing about fixed incomes is the option to reinvest the interest or dividend payments. By reinvesting the interest or dividend earned on the fixed income, investors are able to earn interest on their interest and dividends too. This concept of earning interest on interest or dividend payments is known as compounding, which is a very powerful, often overlooked but effective way to grow your investment. Fixed income is one asset class that allows investors to take advantage of compound interest. It is also a safe form of investment that usually offers a return above the risk-free rate (treasury bill rate).

3. Cash Equivalents

Cash equivalents are short-term financial assets that can be easily converted to cash at any point in time. Depending on the type of cash equivalents, the returns may be comparatively lower because they are more short-term-oriented. This does not mean, however, that competitive cash equivalent assets do not exist out there as there are actually some well-performing cash equivalents on the financial markets, especially when they are well understood by those investing in them. Examples of cash equivalents include certificates of deposit, money market funds and high-yield bank accounts.

4. Real Estate

Real estate basically refers to investments in property. Investing in real estate means becoming an owner or part-owner of a property, and this requires a good understanding of how the property market works. Real estate is one of the most attractive investments for the wealthy because it is a safe store of value and wealth. However, it does come with some challenges, such as the cost of maintaining the property.?

Gains from real estate can be realized in two main ways: (1) rental income and (2) capital gains. Rental income refers to the periodic income that is earned from renting out a property. Capital gains have to do with the profit made on property sold. The ability to maintain and create value on a property will help in making the best of gains, be it rental income or capital gains, on that property.

5. Commodities

Commodities are goods that are traded as they are or can be further processed into other products. There are different types of commodities and investing in commodities entails making gains from the increase in their prices or the size of the margin made when the commodities owned by an investor are sold off. Examples of commodities include gold, crude oil, wheat, coffee and natural gas, among others. Each commodity has its unique characteristics and, as such, has to be properly understood before investing in them. Essentially, one key to understanding is that the demand and supply of commodities is a great determinant of their prices and the type of gains to be made from them.

It is important to note that this is not a comprehensive list of all the asset classes around, but some of the most well-known ones. With the increased sophistication of financial markets and the ever-changing needs of people, new asset classes come up with time. It is also worth understanding that some asset classes are very similar and even related to some extent and, thus, are sometimes categorized under the same group. Also remember that in determining which investment asset to go for, it is essential to understand your investment goals as well as personality so as to be able to choose an asset class that is best suited to you.

Author

Edward Akani?for Bethniel Finance.

Edward Akani is the CEO and Co-Founder of Bethniel Fintech.

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