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Capital investments - Basics

There are many different ways to invest your money. There are 3 factors to consider:

  • Risk

  • Return

  • Liquidity

These 3 factors are also known as the magic triangle on investing.


The risk relates to the possibility of losing capital. A checking account is a very safe investment as you can be sure that you will get your initial capital back. This high safety factor is of course at the expense of the return. A rule of thumb says: the higher the risk, the higher the return.


The return factor relates to the yield per year which you receive for the capital that you have invested. The return is mostly given per year. Other spellings are "p.a." → "per annum" / "APY" → "annual percentage yield", which all aim at the same. There are fixed returns and returns that fluctuate over the year, so they can also be negative. However, the residual risk of not getting a return can never be completely ruled out.


Liquidity is how quickly you can access this money. The cash has a very high level of liquidity as it can be accessed immediately. It is different, for example, with stocks or funds, these have to be sold beforehand and you can only access this money after the sale has been completed on the stock exchange. In short, you can remember: the faster you can buy something else with an asset, the more liquid is it.


In the picture below you will find a comparison of various investment options.





Brief explanation of the individual types of investment:


Cash: Cash is the physical money that we have in the form of coins and bills.


Overnight money: Also known as call money is money that you have paid into an extra call money account in a bank. This investment is characterized by low interest rates and no fixed term.


Government bonds: Government bonds are public bonds that are borne by the state.


Precious metals: When trading physical precious metals, gold, silver or platinum are usually traded. They are usually issued in coins of various sizes or as bars.


Funds / ETF's: These two types of investment are very similar, as both consist of a portfolio of several stocks. The main difference is that funds are actively managed by an investment company and ETFs (exchange-traded funds) passively via an index.


Real estates: Investments in apartments or houses that generate a monthly cash flow.


Shares: A security paper that represents a share from a company.


Collectibles: Trading cards, such as from "Pokémon" or "Yu-Gi-Oh!", Paintings or vintage cars. There are many different collectibles. Maybe you own collectibles without even knowing.


Cryptocurrencies: Digital currencies based on cryptographic tools such as blockchain technology. The focus is on the decentralization of various applications. The crypto currencies should not only be seen as currencies, but rather the "use case", i.e. the benefit or application that they promise. In the background there is usually a complex technology at work, which you can read about in the so-called "whitepapers".


Conclusion:


There are many different ways to invest your money with different levels of security and risk. At the end of the day, however, you have to know for yourself which one to choose and which investment strategy to pursue.




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