Advantages and disadvantages of investing in equities
Types of investments
As soon as we start investing, we immediately come across the first two categories that we need to know and understand before making an investment decision, especially if the objective is to preserve and grow our assets.
We are talking about fixed income investments and equity investments. Each of them has pros and cons that will help us evaluate our cost-benefit depending on the investor profile we have.
This time we will focus on analyzing the pros and cons of variable income investment.
What is variable income investment ?
When we talk about investing in variable income, we mean that we will put our money in financial assets, mainly debt, which do not guarantee a certain amount of return and do not have a fixed term of duration for this investment.
Variable income investment instruments
To invest in variable income, we can acquire several instruments such as:
- These are issued by companies with financing needs. By acquiring a share of any company, we become owners of a percentage of it and, therefore, the yield of these securities is linked to the results of the company in question.
- Also known as exchange-traded funds, most of them usually imitate the behavior of a stock market index or have a theme that defines their investment strategy. Since they are a basket of financial assets, it is not possible to predict their performance at the end of a given period.
- Equity mutual funds. They work the same as any other investment fund, only with the characteristic that most of the fund’s portfolio will be allocated to variable income instruments such as stocks or ETFs.
- When investing in foreign currencies we are also investing in a variable income instrument, since the fluctuations in the exchange market do not allow us to fully define the profit when exchanging one currency for another.
Advantages of investing in equities
- Higher yield – Although past earnings do not assure future income, variable income instruments usually have higher yields than fixed income instruments.
- No terms – Equity instruments are not subject to any term, so you can hold them for 10 minutes or 40 years, depending on your investment goals and objectives.
- In the case of the shares of some companies and specialized ETF’s, when you acquire a security of these, every certain period of time you will also receive the payment of dividends since as a shareholder you own a proportional part of the company and you are entitled to a proportional part of the profits.
- Actually, it is very accessible to invest in variable income instruments since there are shares and ETF’s in the stock market at very reasonable prices, which implies that you do not need large amounts of money to invest in these instruments.
Disadvantages of investing in equities
- It is not known with certainty what the performance of these instruments will be from year to year, which is why they are also considered high risk.
- Although, in most cases, these instruments have higher returns than fixed income instruments, there is also the possibility that, in an adverse macroeconomic environment, variable income returns may be lower than fixed income returns.
- Lack of liquidity. Because there is no maturity of these investments, they are not considered liquid assets.
- In the case of equities, unfortunately the value of these securities does not depend only on the management of the company in question, but the value of the securities will also be affected by the fluctuations of the stock market and the mood of investors.
Investing in variable income instruments is a great option that, regardless of our investor profile, we should have in our portfolio, because it will boost the total return on our investments.