Investments

What they are

These are products or instruments that allow you earn a return over what you have placed, which you can use later to fund your retirement, pay for big purchases, and spend for other long-term plans.

The common types of products are:

• Government Securities: These are loans of the government, and as such are considered risk-free. You earn interest every quarter or semi-annually if you keep them for a fixed period of time, or you can sell them for a profit. The most common are Treasury bills (or T-bills), which are from 90 days to a year. Long-term government securities are called Treasury Bonds (T-bonds) or Treasury Notes (T-notes). Alternately, you can invest in Retail Treasury Bonds (RTBs), which require much smaller minimum investment amounts.
• Bonds: Sometimes called commercial papers (CPs) if issued by private companies. These are loans of big companies that need to raise money for projects and such. You also earn interest on them or sell them for a profit. Of course bonds can be issued by the national and local government as well.
• Stocks: These are shares of ownership in a publicly-listed company (although you can also buy into companies not listed in the stock exchange). You earn two ways: through dividends issued by the company or through capital gains, that is if the market price of the stock goes higher than the price you paid for it.
• Unit Investment Trust Funds (UITFs): Replacing Common Trust Funds (CTFs), UITFs are an improved version, as market prices are updated daily. These are pools of money from various investors, which are then invested by a fund manager (usually a trust department of a bank) into government securities, bonds, and stocks). You buy units of participation. You earn money when the fund's net asset value increases.
• Mutual Funds: Similar to UITFs but more regulated and transparent, mutual funds pool money from thousands of investors. You are basically a co-owner of the fund or investment company, so you buy shares. There are different types depending on your investment objectives, including money market funds, bond funds, stock funds, balanced funds, etc. You make money when the fund's net asset value increases.
• Foreign Currency: You can exchange your local currency into U.S. dollars or other foreign currency, hoping that foreign currency's value increases or appreciates relative to the local currency.
• Insurance Plans: Whole life insurance plans have a savings component. A variation is the variable (also called unit-linked) insurance plan, which gives you greater control on how your premiums are invested. You earn through what's called a cash-surrender value, which grows over the years, and which you can redeem if you terminate the policy before the end of the term. You can also earn cash benefits and dividends at certain points during the coverage.
  
• Endowment Plans: These are insurance products but don't provide lifetime coverage. They are often positioned as investment products because the emphasis is on the savings component and the amount of money you'll earn. You get a guaranteed amount of money after a fixed number of years.
• Annuities: These are contracts with insurance companies that promise you either a fixed or variable return after a certain number of years.
• Pension Plans: These really are just savings plans offered by pre-need companies that guarantee an amount of money after a set number of years.
• Retirement Plans: These are pension plans funded by your employer and given to you when you retire from the company. Typically, these are defined-benefit plans, i.e. it's already pre-determined how much you’ll be given when you retire, such as a full month's salary for every year of service. In the U.S., the more popular type is the defined-contribution plan, usually the 401(k) and also employee ownership and profit-sharing plans, where the benefits you get depend on the amount of contribution you give and how these are invested.
• Derivatives: These investments derive their value from other investments, hence the word. The more common ones are options and futures contracts.
• Real Estate: These are property such as lots, houses, condominiums, etc. that increase in value over the years. You make money by selling for a profit or by renting them out to tenants.

What you earn

• If it's a fixed-income investment, like government securities and bonds, you earn a fixed interest, although you can sell the instrument itself for a profit.
• If it's an equity investment, like stocks or mutual funds, where you own a share in the company, you earn through capital gains for selling when the price is higher than your cost (you can earn without selling, but that's just profit on paper, not profit in your hands). Of course, stocks sometimes pay dividends as well, which in a way is like interest.
• Savings plans, in the form of insurance plans, endowment plans, and pension plans, promises a fixed and guaranteed amount of money after a certain number of years.
• In the end, except for savings plans, investments are bought and sold in their own markets (bond, stock, foreign currency, or real estate market, and as such, you can make money when you buy low and sell high.

What they cost

• You get taxed when you earn money after selling stocks and real estate. You get taxed when you interest. You get taxed when you pay insurance premiums. But mutual funds and retirement plans are exempt from tax.
• You buy many of these products through a broker, dealer, or agent, whether it's a real estate broker, stock broker, foreign currency dealer, government securities dealer, mutual fund agent, or insurance agent. And naturally, they charge fees, get a commission, or both.
• Investments that are actively managed like mutual funds charge a management fee every year.

What's good

• They earn more than traditional bank products. In the case of stocks, mutual funds, and real estate, they can be the foundation for long-term wealth.
• They appeal to all sorts of investors in terms of investment objectives and risk appetite. So if you want to earn as much as possible and are willing to take more risk, stocks and real estate are your choices. If you're a bit more conservative, you may want to stick to government securities. If you want to know exactly what you’ll get, there are bonds and pension plans. If you enjoy a roller-coaster ride, stocks are the way to go.

What's bad

• They're not insured against loss. So it's possible you can lose everything.
  
• They are riskier in general. However, they do have varying levels of risk, from practically risk-free (T-bills) to risky (derivatives).
• Like bank products, watch out for fees, sometimes hidden or imputed, and check the fine print.
• Some of them can be very complicated to understand. But that shouldn't stop you from learning.
  

Where to get them

• For government securities, bonds, foreign currency, and UITFs, banks.
• For stocks, stock brokers.
• For mutual funds, investment companies and universal banks.
• For insurance and endowment plans, insurance companies and universal banks.
• For pension plans, pre-need companies.
• For real estate, real estate brokers and banks.