Before you start investing, you have to understand the different types of investment products. This is so that you know where you are putting your money and how it helps to grow your money. Before reading this, you should read my article on why should you start investing young so that you can find out more about investments.
For the purpose of helping young adults to invest, I will only be covering the investment products that I feel are suitable for the age group.
Stocks
When you buy a stock of a certain company, you are essentially buying a part of the company. If the company does well, the value of your stocks will rise and you will earn money. On the other hand, if the company does not do well, the value of the stocks will drop and you lose money.
Imagine the company as a bag of rice, you buying shares of the company will be like you buying grains of rice from the bag. The value of the rice will be dependent on the bag if the bag is good, the value of the rice will increase, and if the bag is tearing, your rice quality will drop and so does the value.
Bonds
Think of bonds like lending money to a corporate, government, or any organization. The interest rate of you lending them the money will be higher than what banks have to offer. That being said, bonds do carry risks as there is a chance where the lender defaults on your investment and there are also other risks such as interest rate risks.
For example, it is like putting your money into a savings account just that the interest rates are higher and you get back more money at the end of maturity. Bonds are usually quite safe as the risk is not that high.
Central Provident Fund (CPF)
In Singapore, Singaporeans have the Central Provident Fund (CPF), it is an account where the Singapore government opens for every Singaporean the moment they start working. It works just like the 401K just that it is compulsory for employees to have part of their salary put into their CPF accounts.
Why is this a good investment for you? It runs on compounding interest and it forces you to put 20% of your salary into the account. Essentially, the government is helping you to save up for your retirement! It is also very important that you do not touch the money in the account as you should ensure that the account is making full use of compounding interesting to grow more money. The higher the amount, the higher the interest earned by you.
There are cases where people do not put their CPF funds to good use and end up losing their money. Remember that the CPF is meant to help support your living expenses after you retire! You should try to conserve them as much as you can so that you can have a good retirement life.
Options Trading
Options are contracts that allow you to decide if you want to sell or buy a security at a chosen price. Options buyers will be charged for having the rights and this is called “premium” If the market price happens to be bad for options holder, they will let the option expire with no value, which can help them to minimise loss as it would be lower than the “premium”. On the other hand, option sellers are willing to take greater risks and they would prefer to demand for “premium”.
Options have two types, “call” and “put” options. The “Call” option grants the buyer of the contract permission to buy the underlying asset in the future at a predetermined price, which is known as the exercise price or strike price. As for the “put” option, it grants the buyer permission to sell the underlying asset at a predetermined price in the future.
Conclusion
I have selected these products to introduce to young adults as I feel that these products are more suitable for you since you are young and you can afford to absorb greater risks. If you are new to finance, you can check out this article to learn more about a book that helps you understand money!
