I have created the below cheat sheet to get an idea of the risk profile of investments. These are not ALL investment types, but the ones I want to discuss.
This is essentially 0 risk. Hold your cash (emergency funds + funds not ready to be invested or holding for other opportunities)
Can be a good way of earning capital growth (Capital growth is an increase in the value of an asset or investment) Through appreciation of house prices or income through rent (or both!). However the initial investment for one of these warlocks these days is so high (in Sydney anyway) that we’ll tackle this in another post. These kinds of investments could help you build and make that deposit, so read on!
Types of Shares – Ordinary Shares, ETFs & Penny Stocks
Yes, they are all the same things but slightly different. In terms of variety of risk, shares have the largest spread. They can range from low to high, it all depends on the company you chose to invest in. Before we go into this, let’s understand ETFs.
- Ordinary Shares – this is a SHARE in a company. So if the company does well, so will you (in theory).
- ETF – An exchange traded fund (ETF) is a basket (or bunch) of securities that trade on an exchange, just like a share, so when you own a share of an ETF, you will own a little bit of all shares in the ETF.
- Penny Stocks – A penny stock typically refers to the stock of a small company that trades for less than $1 per share and hence the name penny stock. They seem very cheap and you can usually buy a lotttt of shares and then small changes in the price of the shares can make you very rich or poor.
How do you differentiate between high and low risk?
Think – Risk types. A good detailed document can be found here. But I think they are quite easy to understand with some common sense.
- Volatility risk: how big the swings in price can be. I.e penny stocks and mining / exploration shares can have very high fluctuations. If good news comes in boom, if not, bust.
- Timing Risk: Think COVID. Airlines are struggling right now so the share price is probably low (or is this an opportunity?).
- Legislative Risk: i.e Cannabis could be announced as legal
- Currency and Foreign Exchange Risk: Many companies operate world wide. If they have significant operations in Japan and an earthquake happens – potential busto.
- Sector or Market Risk: Technology / mining / Travel / Gold could boom. Which market is your share in?
Generally, with higher risk comes higher (potential) return
I think that’s enough said here.
- Barriers to Entry & Effort
Barriers to Entry here is essentially how much money you need to get started in this space. At least with CBA the minimum is $500 to purchase a parcel of shares. Whereas a house is roughly going to set you back 10% of the purchase price. (Kel’s friends recently purchased a $2m house, so that’s at least $200,000 just to get started!). It may also be hard to set up trading accounts, although it’s very simple see my – Shares Part 1 – Setting Up A Share Trading Account.
- Effort: How much time do you want to spend monitoring and investigating your investments? With MOST ETFs, you can generally just sit back and trust that someone smart is doing the hard work for you (that’s why they take the management fee). Otherwise you might find it fun to research penny stocks and play ‘Where’s the Gold’ and get some Lucky 88!
Who even knows with this stuff – it’s literally gambling so if you want to spice it up a bit – I suggest Compound – for no reason other than I saw it somewhere in my crappy newsfeed.
Next in the series we’ll look into:
- Resources on how to find and chose Shares – blog to come soon
- How to buy and sell through your bank or broker – Shares Part 1 – Setting Up A Share Trading Account.
- Tracking your investments – blog to come soon