Getting on the investment bandwagon can be a good idea, but do you have the required know-how?
There comes a time in the lives of most Australians when they wish to start saving their money to build their wealth. The good thing is you can start investing with relatively small sums, and $1,000 is a pretty good start. Given options such as term deposits, shares and futures, knowing how they work becomes crucial, so you know what’s best for you. You would also have to pay attention to aspects like minimum amounts, fees and commission.
What are my options when I want to invest $1,000?
- Pay off existing debt first
If you have an existing credit card debt, student loan, personal loan or home loan, use some of the money you have to repay your debt.This can help you save in the form of interest in the long run, and the quicker into a loan you make a lump sum repayment, the more you can save.
- Contribute extra towards your super fund
Any money you can spare towards your super fund can increase your super savings considerably. Know that the government does not tax contributions from your after-tax income because you’ve already paid tax, but there’s a limit in place before you have to start paying tax. If your pre-tax annual income in less than $50,454 and you make after-tax super contributions, you stand to get matching contributions from the government.
- Share trading
Simply put, buying a share is buying a single unit of ownership of any given business. You can buy shares of companies listed on the Australian Securities Exchange, and you get to choose from shares of over 2,000 companies. You can benefit by going the share market way if there’s an increase in share price and also if you get a share in the company’s profits in the form of dividends.
- Trading options
Options give you the ability to control stocks and others assets and capitalise on price movement without actually owning them. The price of options is generally low because they expire in weeks or months. Understanding options can be difficult, and it’s best that you go this way only after getting the required training and expertise.
- Futures and forwards
Futures give you the power of leverage,and as little as $1,000 can control a futures contract that values at more than $15,000. Downsides are that your broker may require you to have access to additional funds in case of margin calls, and if the trade does not go as per plan, you could end up losing more than how much you invested.
- Trading foreign exchange
Like futures, foreign exchange trading lets you control much more than your original investment through leverage, but this leverage can also result in magnified losses. You need little money to start, this realm is not difficult to comprehend and you’ll essentially be dealing with no more than a few currency pairs.
- Term deposits and high interest savings accounts
Both offer guaranteed returns, in accordance to a given interest rate. With a term deposit, you will have to lock your money for a given time period. With high interest savings accounts, you can access your money at any time, but you may have limited means to do so.
- Cash management accounts
Cash management accounts can let you manage all your investments using a single platform. The money in your account would earn interest, you can get access to an online trading platform, you can use the same account to manage your super fund and you can also use it to simplify tax returns.Back to top
How do I compare investment products?
- Minimum investment amount. When it comes to buying shares, you can invest in as little as one share. If you’re considering opening a term deposit, you may come across minimum limits of $500 or $1,000. If you wish to start trading foreign exchange, you can start with as little as $25. Futures also have a low point of entry.
- Commissions and fees. Investing can turn out to be an expensive affair if you don’t pay attention to this aspect. When you deal in shares and futures your broker may charge a commission or fee. This can be a fixed amount or a percentage of the trade’s value. Australian financial institutions tend not to charge any ongoing account keeping fees for term deposits and high interest savings accounts.
What are the pros and cons to investing in an asset other than a savings account?
- Guaranteed returns. Savings accounts come with no risk, and the money in your account continues to earn interest over time. How much interest you earn depends on the financial institution you deal with. Online banks tend to offer better interest rates because they don’t have to deal with overhead expenses typically associated with financial institutions. Some savings accounts let you earn bonus interest if you meet certain criteria.
- Government guarantee. The Australian Government, through the Australian Government Guarantee Scheme Security, secures deposits of up to $250,000 per person per institution. This makes savings accounts and term deposits good places to park some of your money.
- Flexibility. You get to choose from different types of savings accounts to suit your needs, and some give you easy access to funds in your account via online and phone banking. If you put your money in shares or futures, getting access to required money can take some time.
- Low returns. While savings accounts offer guaranteed returns, they tend not to match up with returns that you may get from other forms of investment alternatives. In Australia, savings accounts tend to offer standard variable rates in between 2% to 3.5%.
What are the risks?
- Not enough research. Even if you’re putting your money in a savings account, comparing your options is important because not all come with the same interest rate. When it comes to more complex means of investing such as shares, options, futures and foreign exchange, it becomes all the more important to understand your alternatives, simply because they come with varying degrees of risk.
- Fees and charges. When you’re investing your money you’ll have to work along with a financial institution or a broker. In either case, make sure you find out how much you may have to pay in different circumstances.
Is there anything else I should consider?
- Risk. When you start investing it is crucial that you understand the basic relationship between risk and returns. A general principle suggests that higher the perceived risk, greater the potential returns. However, perception of risk can vary from one individual to the next, and is not a necessary reflection of statistical analysis.
- Risk profiling. Risk profile refers to how much risk you’re willing to take and how it can affect your decision making process. Risk profiling can help identify optimal investment risks after taking into account the risk required, tolerance to risk as well as risk capacity.
- Financial goals. Financial goals are ideal when they are measurable and specific. Instead of saving indefinitely towards a comfortable retired life, it is best that you think about how much money you’ll require then.
Frequently asked questions
How does diversification help?
Investing in different asset classes helps minimise your risk because a negative impact on any single asset class will not have too much of a bearing on your overall investments.
What is a penny stock?
These are stocks that trade at low prices, and different bodies set the cap is differently at $1, $3 and $5. These stocks tend to come with higher risks than traditional stocks, and you can find them across sectors like biotechnology, oil and gas, gold and technology.
What is a managed fund?
Such a fund pools together people’s money to invest in different assets classes and a fund manager typically makes investments on behalf of investors in the fund. Such funds give individuals the ability to diversify through professional assistance.