Investment Basics

The major asset classes

There are four major asset classes: cash, fixed interest, property, and shares (Australian and International).

Cash

Cash refers to investments such as bank deposits, cheque accounts and cash management trusts. Cash gives you income only (in the form of interest) and is the most secure form of investment. However, the high level of security comes at a price, because over the long term the return from cash is very low compared to other asset classes. A cash investment gives you interest only, which means your capital does not grow in value over time, and you may face the prospect of your investment not keeping up with inflation.

Fixed interest

Fixed interest investments are generally income-producing assets, although the capital value can rise (or fall) in certain circumstances. These are generally for terms of one year or more and include government bonds, debentures, mortgage trusts and fixed term deposits. With most fixed interest securities you invest for a set term at a set interest rate, and receive your capital back at the end of the particular term. As with cash, however, fixed interest investments don't always keep pace with inflation.

Property

The various types of property investments available include: residential, industrial, commercial, retail and agricultural. Property investments can provide tax-advantaged income from the rent received and can also grow in capital value. Retail, industrial and commercial investments are usually made via specialist property trusts.

Share (Equities)

When you buy a share, you're buying a stake in a company. As a shareholder, you share in the profits and future growth of that company. The ownership of shares can provide a growing income stream from dividends, as well as the potential for capital growth. Dividends represent the portion of a company's profit, which it distributes to its shareholders. Dividends paid by Australian companies often include the benefit of dividend imputation, where investors receive 'imputation credits' for tax already paid by the company. If the shares are held by a super fund, these credits can be used to reduce the amount of tax that your super fund pays on your behalf or, if held outside super, may be used to reduce your personal taxation liability. As Australia represents only around 2% of the world's share markets, it makes sense to invest in international shares as well as Australian shares, in order to achieve a greater level of diversification. Many of the biggest companies in the world – companies that are household names such as Microsoft, IBM and McDonalds – are not listed on the Australian Stock Exchange. Investing overseas also gives you access to industries and opportunities that aren't available here in Australia. However, international shares have additional risks due to fluctuations in currency. In addition, there are political risks as there may be changes in the stability of foreign governments, as well as regulatory risks due to changes in overseas laws and institutions.