I recall listening to a presentation and thinking to myself: Is it really that easy?

It was not enough for me to completely believe 1 source. So over the next month, I listened to a variety of speakers to check if all these gurus were singing the same tune.

At the same time, there existed countless questions in my head. I was convinced that I had to start, but there were just so many unknowns.

So in today's article, we will tackle the extended question of "what to trade/invest in". (If you haven't already read the earlier part on the important difference between the 2 terms, please head here.)

This is because for your practical understanding, this was the chart that caught my attention:

If I had just bought into this index fund 5 years ago in 2016 and held onto it...

My wealth would have approximately doubled by now. Wow!

Even if I had bought into it right before the crash in March 2020, I would be up by an approximate 20% at this juncture. Which is infinitely better than whatever interest I would generate on even the best savings account.

But what is an index fund? Is it the best choice of vehicle for me? What about stocks? Or cryptocurrency that is all the rage these days?

Before we jump into the topic, here is a special note for those of you who have yet to open a brokerage account (more on that in a subsequent article). Depending on your choice of brokerage platform, you may be required to correctly answer at least 15/20 questions on the SGX online academy.

Among these 20 questions, you can expect some on these trading/investing vehicles.

If it takes you a while to absorb new information, then it would help to already have some understanding of this topic before taking the test.

Overview: The textbook approach

This flowchart provides a textbook approach to understanding the various trading/investing vehicles available:

Source: Money For The Rest of Us

The reason why this is a textbook approach, is because this is how the content is also structured by the Chartered Financial Analyst (CFA) Institute. There is even a 15-question chapter review at the end to test your understanding of the subject.

For those already keen for a fun test of your knowledge - head straight to page 23/27. (I jumped straight to the review just to check how much I can remember off-hand - thankfully I passed!)

Anyway, while this approach has its merits, and it certainly provides a broad overview...

The formal (and perhaps dry, if you will) nature of the topic presented in this manner is probably not ideal for facilitating your interest in these vehicles.

Therefore, let's approach this in a more relatable manner.

Application: The practical approach for retail traders/investors

Let's face it - whatever you don't use, you will forget.

No matter how fantastic it sounds, if you can’t generate returns from it, you’ll throw it out.

Or if you can’t sleep well on it, then it’s time to review your decision and make adjustments.

So let's talk about the common trading/investing vehicles that you would want to consider, and the key differences of each. Ultimately, you should have an idea of which would be suitable for your personal financial goals.

1. Stocks

Buying a stock means to have a direct ownership into the company's business. The minimum number would depend on the exchange in which the stock is listed on. For instance, you may purchase 1 share in the US market, in contrast to the 100 shares in the Singapore market.

The term "shares" is often used interchangeably with "stocks". When it comes to the "stock market", another term would be the "Equity market".

When it comes to your selection of companies to trade/invest, you would normally approach it from a Fundamental Analysis or Technical Analysis perspective. The best is to combine your knowledge to make the most informed decisions - we shall cover this in detail in a subsequent article.

For now, suffice to say, your goal of owning stocks would be either to (1) collect dividend payouts, or (2) sell it for a higher price for capital gains.

Considerations

As you can tell, buying into stocks does present its risks. The considerations would differ based on your objective of trading or investing, but you would still need to decide on your stock picks (what to buy). Thereafter, the price to buy and sell (when to buy/sell).

The upside is, stocks can present high returns over a relatively shorter period as well. Of course, the reverse also holds true. Just think about the news on GameStop and AMC. A word of caution though that such news would attract individuals with a "get-rich-quick" mentality.

Rather than a gambler's perspective, it would be prudent to think of buying into a good business via stocks. When the business does well, it would have the means to pay out better dividends. When there is investor confidence, the share price tends to perform better over time too.

While there are no guaranteed outcomes, it helps to know that there is a basis of selection. Although there’s no way of predicting where the market will go, you can stick by your entry and exit plan to stay in the game.

2. Exchange-Traded Funds (ETFs)

Stock picks can be difficult. There are so many stocks, how do you know what to choose? Perhaps there is also a challenge with capital if you're looking to purchase multiple stocks of blue-chip companies.

In this case, exchange-traded funds (ETFs) may be an ideal trading/investing vehicle for you. ETFs are also traded on the stock market, and involve buyers pooling money into these funds to achieve its stated mandate.

Similar to stocks, there are a variety of ETFs available, all of which comprise of a basket of assets. Some common ones for your consideration are:

• Index ETFs: These track a specific stock exchange index. For instance, the SPY ETF tracks the S&P 500, which is an index which comprises of the 500 biggest companies in the US. Locally, the STI ETF tracks 30 of the largest companies listed on the Singapore stock exchange.
• Sector/industry ETFs: Perhaps you are bullish on a specific sector, or would like to go into specific industries. From broad sectors like technology, to specific industries such as clean energy and blockchain, there are ETFs which have diverse exposure into a range of companies in that sector/industry. Here’s a recent article on megatrend ETFs for your reading pleasure.
• Commodity ETFs: Instead of buying directly into commodities (physical ownership) or through futures contracts (a different ballgame by itself), ETFs can provide easy access to partake in commodity trends. Commodities range from the common ones like gold and silver, to metals like copper and palladium, or even agricultural commodities such as corn and wheat.

Considerations

ETFs, being diversified in nature, provide you with less volatility as compared to buying individual stocks. In terms of how you can profit from them, it's similar to stocks - either via dividends or capital gains.

On that note, due to its diversified nature, ETFs are also not likely to have huge price movements over the same period of time compared to stocks. Depending on your goal, ETFs are likely to make suitable investing vehicles rather than trading vehicles. This is because ETFs tend to lack liquidity as not all of them are traded with high volume.

Especially when it comes to partaking in long-term trends, ETFs may play out better as you wouldn’t know which company would turn out to be the eventual leader in the pack.

3. Mutual funds

Commonly compared against ETFs, mutual funds are a "managed" version of the monies pooled together by buyers. Instead of a simple pooling to buy into the said basket of assets, mutual funds are actively managed by professional managers. These managers aim to build an optimal portfolio in terms of returns.

So unlike an ETF where holdings of its assets (e.g. weightage into each company’s shares) are transparent, this is not the case with mutual funds. Nonetheless, you would still get dividend returns, and be able to profit from capital appreciation.

Another name for mutual funds is unit trusts. Since these are actively managed, mutual funds cannot be purchased from the stock exchange, but rather through investment companies or financial institutions like your banks.

Considerations

While mutual funds also have the benefit of diversification, this comes at a fee. This is in contrast to ETFs, which are not actively managed. Mutual funds charge professional management fees, where fund managers actively rebalance the portfolio. Median annual fees are approximately 1.5%, which could amount to a significant sum depending on the size of your investment. Furthermore, mutual funds typically have a higher minimum investment amount.

Still, if you prefer to have your funds managed by professionals, mutual funds could provide you with that peace of mind. On that note, there are no guarantees that the mutual funds will perform better than, say, the SPY ETF. Just because there is active management, doesn't equate to it naturally achieving better profits.

If you feel better entrusting your investments to professionals than making your own picks and decisions, mutual funds could work well for you.

4. Bonds

Among these trading/investing vehicles, bonds are perhaps the most "boring" one suitable for investors. Bonds are fixed income instruments sold by the government or large corporations to raise funds. This fixed income goes to you because you are lending your money to the government/company through the sale of bonds. Then, they repay that debt to you with interest.

Locally, probably the most known one would be the Singapore Savings Bonds (SSB). Besides its backing by the government, a huge benefit of the SSB lies in its liquidity.

Considerations

Depending on the type of bonds, the risk can be as little as it gets. Especially in the case of SSB, you could buy into it without fear of that money shrinking over time or losing to inflation.

On that note, with little risk comes little possibility of huge gains as well. Bonds typically have a fixed percentage return over the bond's tenure. There is also a range of maturity periods, so you might have to commit to that investment sum for a prolonged period of time of 20-30 years.

5. Cryptocurrencies

On the other end of the risk spectrum are cryptocurrencies.

Although Bitcoin and Ethereum are the dominant cryptocurrencies, there is actually a variety of coins available for trading/investing. Be it altcoins, stablecoins and even memecoins, each cryptocurrency has its own purpose. By extension, whether it is suitable for trading or investing, would also vary accordingly.

While cryptocurrency has been increasingly featured on the news in recent times, it remains a mystery to the general public. For the savvy trader/investor, however, hopping onto the cryptocurrency bandwagon could prove a worthy decision with huge payoffs. Besides returns from capital gains, it is also possible to earn passive income by means of staking your cryptocurrency.

Considerations

As a form of alternate investment, cryptocurrencies would likely not be the average retail trader's cup of tea. They are extremely volatile, and the risks are relatively high due to the largely unregulated nature of the cryptocurrency space.

More than any of the aforementioned trading/investing vehicles, going into cryptocurrency also requires much more research. (Or at least, I would recommend that you understand the topic sufficiently well so that you would have conviction when purchasing your coins.)

In terms of the timeframe and liquidity, however, you could exercise as much discretion as you do with stocks. Similarly, you would also be able to apply both Fundamental Analysis as well as Technical Analysis on the cryptocurrency to aid with decision-making.

As the saying goes: The early bird gets the worm. While it is still relatively early to get into the cryptocurrency game, it might be a good idea to explore what the hype over cryptocurrency is, and ultimately decide if this vehicle will be suitable for you.

Conclusion

Remember, everyone is on their own journey. Your need for liquidity, aversion to risk and financial goals are just some of the considerations when it comes to selecting the right trading/investing vehicles. What is suitable for you may differ from your family and friends. After all, your financial journey is a personal one.

Having said that, it is also entirely up to you to decide to understand your finances and grow your wealth. If you do nothing at all, inflation will likely get ahead of your hard-earned savings.

When you do take action, it is important for you to take responsibility for your trading/investing decisions. Understand the risks and consequences, and find the rhythm which suits you best.

As we progress, we may also find that certain vehicles no longer suit our needs. Or perhaps, it would be a good time to diversify your pools of wealth. The cycle repeats - seek knowledge, test it, and fine-tune until you find your unique style to trade and invest.

Can anybody start trading and investing on their own? If you've read up to this point, the answer is a resounding yes. Stay tuned to the next parts of the series as we adopt a systematic approach in generating a step-by-step beginner’s guide.

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