The Most Important Terms
When reading about investment and investing, the same terms come up again and again. Especially when you're new to this field, the technical terminology can be a bit complicated. Here you'll find a summary and brief explanation of the most important terms.
Savings Account
A savings account is a traditional form of investment specifically designed for saving money. You open the account, with variable interest rates and no fixed term, at your bank. It should be noted that in the event of a bank crash, savings accounts are subject to the Austrian Act on the Recovery and Resolution of Banks (BaSAG) and the maximum limits of the deposit guarantee scheme.
Building Society Investment
This kind of investment has two phases. Firstly, you invest regularly for a fixed period of time to reach a minimum balance in your building society savings account. Then, after the contract is allocated, you receive the amount you saved as well as a loan. The terms of said loan were negotiated beforehand. You can then use the money to buy or renovate a property.
Life and Term Life Insurance
These insurance models supposedly offer higher security, for example due to capital guarantee or a fixed guaranteed interest rate. However, the disadvantage for this kind of insurance is that the return on investment will very likely be below the inflation rate. In many cases, the costs are even greater than the gains.
Bonds
A bond is a debt instrument that represents a future claim. In other words, with bonds, you lend money to someone, such as governments or companies, and hope to get that money back – with interest. A bond increases in value when interest rates fall, as this means that demand for that bond is high. Bonds were long considered to be relatively safe, but they are based on the expectation that the debtor will always be able to repay the money – which does not always have to be the case.
With this type of investment, you should ask yourself: Who is liable for ensuring that I actually receive this money if the company I lend it to goes bankrupt? Even with government bonds, there is a risk of the government implementing a debt cut based on the CAC clause.
Eurozone government bonds bought after 2013 include the so-called Collective Action Clause. This allows governments to change their payment obligations under certain conditions. Worst-case scenario: The creditors do not get their invested money back. A loss of 100% of your investment is unlikely. A partial debt cut is certainly possible.
The safety of government bonds depends on the individual country. Countries with a low debt ratio, such as Germany or Switzerland, are often considered to be safer.
Shares
By buying shares, you acquire i.e., a share of the corporation’s capital, and thus participate in its profits. The value of a share depends on the financial market's expectations of how successful the company will be in the future, i.e., on supply and demand. Shares differ depending on the ownership and type of a share.
Investment Funds
Instead of investing in just one stock, you can invest in many stocks through an investment fund (risk diversification). The funds are put together by experienced investment firms. There are three different types of investment funds:
- Equity funds invest in stocks.
- Bond funds, also called fixed-income funds, invest in bonds.
- Mixed funds invest in a mix of stocks, bonds, and other assets, generally aiming for a combination of income and growth.
Funds can also be categorized as follows:
- Geographical investment area, i.e., country funds, international funds, and global funds.
- When a fund invests entirely in a specific theme, it is called a thematic or sector fund. So-called megatrends, such as technology or health science, can be targeted.
- Fund of funds/Umbrella funds do not invest directly in security papers. Here, the money is invested in other investment funds. The goal is broad diversification.
ETFs
ETFs (Exchange Traded Funds), also called index funds, track an index in which you can invest. Compared to other investment funds, ETFs have significantly lower costs: Since they simply track an index, they don't need to be actively managed.
The most valuable companies on a stock exchange are included in a stock index. This index allows you to roughly track the performance of the respective stock exchange: If all companies perform poorly and their share price falls, the index also falls. If half of the companies perform well and the other half perform poorly, the index remains roughly the same. ETFs track existing indexes.
Investment Platforms
Now you know the different products and models in which you can invest. The question remains: How do I do that? There are various platforms you can choose. Each of these options has its advantages and disadvantages. As an investor, you must decide for yourself which model is the best choice for you. If you want to actively decide how to invest, the following options are available:
- Online securities accounts or accounts at a bank. Here you can choose from a wide selection of the investment types mentioned above.
- Unit-linked life insurance. This option can offer significant cost advantages if certain points and parameters are kept in mind.
Asset Management
Asset management services offer clients greater individualism and transparency. Here, a professional investment team builds a custom investment portfolio according to the client's wishes. The asset management service charges an annual fee, which is agreed upon individually in advance. No commission is charged for the individual investments.
