Understanding Common Investment Products and Generating Multiple Streams of Income

Many people remain unaware of this. The amount of interest money you’ll probably earn from your personal bank savings can be easily overwhelmed by current rising inflation rates.

As such, you may wish to consider investing your spare cash to grow your wealth from multiple income streams. However, before committing your hard earned money, you should make an effort to learn about the various investment products.

Then make an informed decision in which products to invest in. This is especially important for beginners.

Here are a few ways you can use to generate and benefit from multiple streams of income through investment products.

1) Share or stock InvestmentsYou can become a small owner of a company when you buy shares of that company. In other words, you’ll have a small stake in the performance of the company.

It is therefore essential that you spend time to find out more about the company’s operating model, business environment and its management. This allows you to gain a better understanding of the company’s strategic plans, key challenges and opportunities.

2) Exchange Traded FundsExchange Traded Funds (ETFs) are large sums of money investors pooled together to buy company stocks. Such funds are special because they are traded intraday on a stock exchange like stocks.

ETFs are similar to unit trusts in terms of diversification and professional management. However, the management fees for ETFs are comparatively lower because ETFs use a passive indexing strategy. This allows investors to access capital markets and commodities efficiently.

Some ETFs related risks would include foreign exchange risk, when the local currency is not used and the performance level of constituent securities.

ETFs are relatively easy to understand and managed, even by yourself, if you can grasp the underlying investment concepts. Investment costs are low, typically small brokerage fees which you can generally afford.

3) Investments TrustsAgain such trusts are nothing more than large amounts of money pooled together. Investors generally look into two types of investment trusts: real estate investment trusts (Reits) and business trusts.

Reits are property funds that invest in real estate assets such as commercial, industrial, retail, hospitality, logistics and residential properties. Business trusts are business enterprises set up as a trust structure in a non-corporate sense and they are usually not focused on real estate.

Such trusts would be appealing to you if you are looking for asset-backed investments that provide returns that are regularly paid-out rather than capital gains. The down-side, however, is such trust are strongly influenced by market fluctuations, which can get pretty wild.

4) Structure WarrantsA warrant is a type of security issued by third-party financial institutions (usually together with a bond or preferred stock) that gives the holder the right to purchase a certain amount of common stock at a stated price on or before a specified expiry date.

Therefore, investors who think that the price of an asset will rise over a specific period of time will buy “call warrants” while those who think the asset price will decrease will buy “put warrants”.

The biggest advantage of warrants is leverage. As structured warrants are commonly priced at a fraction of the underlying asset, this leverage effect can enable investors to gain exposure to the asset in a cost-efficient manner. In addition, potential earnings can be unlimited depending on price movements while maximum potential losses are limited only to the value of your investment in the structured warrant.

Investors should be careful as structured warrants can be very volatile. For example, a small change in the movements of the underlying asset could result in a much larger movement in the price of the structure warrant. Also, the warrant’s value depreciates over time and becomes worthless if it is not exercised before the expiry date.

I do not advise you invest your hard earned cash in warrants unless you have a clear understanding of how the system works and you have an investment appetite to withstand volatility.

5) CertificatesCertificates are structured financial products issued by financial institutions. They are similar to ETFs where the investment opportunities are market-themed. Such investments themes can be quite unique, for example, climate change and luxury goods! Currently, there are two main types of listed certificates: participation and daily lock-in certificates.

Participation certificates are designed to track the performance of the underlying assets or stocks that could be listed in overseas exchanges.

Lock-in certificates are yield-enhancement products where the investor accumulates a lock-in amount during the term of the certificate if the underlying shares perform within a specified period of time. Otherwise if the shares do not perform the investor will not accumulate any returns.

6) Futures ContractsFuture contracts are exchange-traded contractual agreements to buy or sell an underlying asset at a pre-determined priced on a specified date. The underlying asset could be a commodity, bond, currency or stock index.

However, unlike a structured warrant, there is an obligation on the investor to fulfill the contract at the pre-determined price.

During a bear market, investors can benefit from the downward movement of the securities market by “shorting” a futures contract. The contract would be used to sell the underlying commodity and thus hedge (protect) their share portfolio from a market downturn.

Conversely, during a bull market investors can decide to participate in the broad market movement by buying a futures contract.

In general, certificates and futures contracts would require significant investment knowledge and a fairly large risk appetite. Beginners can easily “burnt” their fingers and lose their shirt. It’s best that the interested investor engage a professional financial adviser for such endeavors.

ConclusionAs you can see, investments are a clever start to earn extra cash from multiple income streams. Rather than earning a pittance from bank interest, a sound retirement plan should almost always include some form of investments. Not only that, you should never under-estimate the power of compounding. For example, a conservative stock fund may earn you around 3 to 4% returns annually but the overall profits can be substantial over a 10-year period.