There are plenty of different insurance and savings products on the market, but many people are confused as to the difference between the two. As a result, a frequently asked question is, “What is the difference between a risk and investment product?”
This is a product offered to people, based on a security, that is bought with the expectation of earning a return, usually in the form of money. They cover a broad range of investment options and are aimed at helping people meet their short-term and long-term investment goals.. Here are a few examples of different investment types.
These are suitable for doing long term investing. This is where you invest your money into various companies and stock markets. It can be risky due to market ups and downs. Here are some examples:
This is where you have decided to ‘buy’ a portion of a company and are therefore entitled to a proportion of its profits. This is considered a growth investment because it helps to grow the value of your original investment over a period of time. Even though the prices can change daily, shares have been known to bring in higher returns than other assets and work well if you are looking to invest in something long term.
When you buy property, you have yourself an investment product. This is because it it something you can maintain or continue to build up and its value rises over time.
Insurance policy products are often part of an overall financial plan and come in many forms, life insurance, health insurance, home insurance and so on. They are compiled with specific objectives in mind. For example, you have decided it is time to get health insurance so you do you homework and sign up with the best suited health plan. You then pay a monthly premium which becomes your ‘investment’ in the plan. When you are in a situation where you have health care expenses, you are able to claim these costs from your health insurance. Insurance products can be complex so it’s good to do your homework.
Risk is defined, in the investing world, as a chance that your (as the investor) actual return may not be what you expected. It means that there is a chance of losing some or even all, of your original investment. Low risk is linked with low potential returns while high risk is associated with high potential returns. Ultimately, you want to try reach that balance in the risk/return trade off where you have the lowest risk while still getting a high gain.
Investment risks can be divided into systematic and unsystematic categories
- Systematic Risk
Also known as ‘market risk’ or ‘un-diversifiable risk’. This is risk that is affected by day-to-day fluctuations in the stock’s price. It includes things like interest rates, recession and wars, which affect the entire market and they can’t be avoided. For example, if you went and invested your money in Eskom but a war broke out and eskom had to shut down, this would be market risk.
- Unsystematic risk
Also known as ‘specific risk’, ‘diversifiable risk’ or ‘residual risk’. This is risk associated with a company or industry that you have invested in. Things that affect this could be news that is specific to a small number of stocks, such as a sudden strike by employees of a company you have shares in. Using the eskom example again; employees are unhappy and are striking for wage increases. This means the value of your investment will fluctuate until things stabalise again.
There are many ways to invest your money and you will probably come across a handful of terms. This makes knowing what exactly to invest in seem complicated. It is a good idea read up and educate yourself on all the terms and references before making any decisions. Then you can begin to think about piecing together some options that would fit your personal circumstances and risk tolerance.