For anyone who’s never invested: a quick and simple guide on investment accounts.
Get financial security and stability by using an investment account to generate capital gains. There are many different ways to invest your money, financial institutions tailor different accounts to suit different investment classes. Read about the different types of investment accounts, the benefits and the risks.
How does an investment account work?
An investment account can be any number of accounts that give you a return. Investment accounts include: share trading accounts, self managed super fund accounts, term deposits, and deeming and retirement accounts. You can also choose from direct investment accounts that act as a hybrid savings account and share trading account. Investment accounts present different risks, the returns are different and different investment accounts are suited to different types of investor too.
How do I compare investment accounts?
Consider these points when you compare investment accounts.
- Risk profile. Riskier investments give greater returns. Savings accounts and term deposits are among the safest types of investments, whereas share trading has the potential for big gains and losses. Everyone has a different risk appetite. There is a relationship between your risk appetite and your investment goals.
- Your investment goals. Why are you investing? Is it to grow your retirement nest egg, are you saving for a deposit for a home or are you looking for a quick dollar. Access to capital and risk appetite are two important factors in deciding your investment goals and subsequently which investment account is right for you. For example, a high interest saving account is a better investment account for someone saving for their first home than a share trading account. Share trading can lead to big gains, but the chance of losing everything probably won’t appeal to someone saving for their first home. Your investment goals dictate your investment strategy, which is a must have for anyone comparing investment accounts.
- Your investment strategy. Considering your investment goals, which investment account or investment account mix is suited to your needs. You can hedge your bets by choosing the right mix of investments. Your investment strategy also needs a time frame.
- The length of the investment. Are you investment goals short, medium or long term? Different investments have different investment cycles. You can invest in a term deposit for a set period of time, for example, shares can be a little less black and white. Your goals and timeframe to realise those goals should help you make a decision about the best investment account for you.
- Liquidity. Also compare different investment accounts based on how easily you can access your money. Savings accounts are among the most liquid type of investment account, you can get your money when you want it. Securities only become a liquid asset if you can find a buyer.
What are the different types of investment accounts?
Investment account is an umbrella term which includes a number of different financial products. Common types of investment account can include:
- Share trading investment accounts. Trade securities using a share trading account. This type of account has features that will appeal to traders, such as free brokerage. A share trading investment account can be tailored to suit your needs, for example, an investment account can easily be made into an investment loan if you need more capital.
- SMSFs. This can be a series of accounts for your SMSF, one account for SMSF savings, an account for day to day expenses and an account for trading and investing, SMSF investment accounts are offered by most major financial institutions.
- Margin loans. A margin loan gives you a line of credit to use to invest. Margin loans can be secured to a property or other asset such as a share portfolio. Margin loans can be used for certain investments but not others. You can use a margin loan to invest in common types of investment accounts like what’s discussed on this page
- Term deposits. One of the safest ways to invest your money, a term deposit gives a higher return when you lock your money away for longer periods. There’s a penalty if you want to access your money before the term deposit matures and there are bonuses if you continue to invest your money once the first investment matures. Term deposit accounts are common and you can easily compare rates and fees using websites such as finder.com.au
- Cash management accounts. A cash management account is also called a high interest savings account. Like a term deposit, this investment account gives you a guaranteed return on your deposit. Unlike a term deposit, you can earn bonus interest for an introductory period or when you meet certain conditions, such as maintaining a minimum monthly deposit, and you can access your money when you want without penalty.
- Deeming account / retirement account. This type of investment account is aimed at Australians who are retired or claiming government benefits. Funds in a retirement account accrue interest at a rate tethered to the government’s deeming rate — the investment rate of return used to calculate Centrelink benefits. Deeming accounts are offered by most registered deposit taking institutions.
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What are the pros and cons of using an investment account?
- Financial gain. Different investments and investment accounts have the potential for different gains. The potential for capital gains is tied to the risk of the investment.
- Choice. These types of accounts give you control over how you spend your money. Share trading accounts, retirement accounts, savings accounts and SMSF-funds are all different types of investment account.
- Risk. The risk of suffering a capital loss.
- Not for everyone. You need to have done your homework before you start investing and open an investment account.
What are the risks?
- How risky are you? The investment risk varies depending on the investment type. Term deposit and high interest savings accounts are basically no risk investment accounts, but the returns are low compared to the potential for capital gains from trading shares.
- Margin lending. A margin loan investment account can be a great way to get capital to invest; however, this is a risky way to access cash. If you suffer a loss, the lender can claim the asset you use as a security for the margin loan.
Frequently asked questions
How do I open an investment account?
You can apply for an investment account if you’re over 18 and if you’re applying in your own name or in the name of a trust. Each type of investment account has it’s own application requirements. Before you can open an investment account, you may need to have an account with the financial institutions, like a transaction account and a credit card or a home loan for example. Some investment accounts have a minimum opening balance, you need to provide your address, your tax file number (you can supply this information after you apply) and information about any accounts you hold with the financial institution.
Can I open a joint investment account?
You can jointly open some investment accounts but it depends on the provider and type of account.
Can I have more than one investment account?
By holding a diverse spread of investments you’re reducing your risk. You can have multiple savings accounts, share trading accounts, term deposits from the same or different financial institution at a time.