Financial Products – Quick Comparisons

Stocks and Shares. Property. Fixed Deposits. Unit Trusts. Gold. Foreign Currency.

Few Singaporeans have not invested in one or more of these assets, and fewer still have not heard of them. Whether it’s for making our money work for us, receiving passive income (income we’d receive if we stopped working) or simply trying to achieve higher returns, investing – narrowly understood as enhancing our wealth – is a popular and fairly-well-understood activity in Singapore.

But: conditions change. Markets fluctuate. Nothing – property valuations, the stock market, gold prices – goes up for ever. We think it’s time to poke deeper into investment matters on our journey to understand how the different financial products and instruments available today can help us in our goal of consistently achieving higher returns while managing our risk.

Let’s define a few terms before making a detailed comparison.

The first distinction we’ll encounter often is between Investing and Trading. The fundamental difference between the two is that investing has a long-term perspective, typically at least a few years, while trading has a short-term perspective, typically less than a year (and sometimes a few months, weeks, days or even hours). Investors, therefore, are interested in the long-term appreciation of their assets while traders are interested in short-term price fluctuations.

Secondly, financial professionals generally classify investments into 4 classes (‘Asset Classes’):

  • Cash and its equivalents – eg, Bank Deposits and Spot Forex
  • Stocks(Shares, Equities) and other assets based on stocks such as CFDs, and some Unit Trusts, ETFs and Options
  • Property and other tangible assets such as Commodities (eg, gold, oil, silver), art (eg, paintings, pottery, sculpture) and fine wine.
  • Bonds and other Fixed-Income assets (explained below).

Thirdly, all financial products and instruments belong to only two families:

  • Exchange-Traded
  • Over-The-Counter (OTC)

Exchange-traded (public) financial products and instruments are listed by a national exchange, meet strict legal and listing criteria, and are usually considered highly-liquid investments. Examples include ETFs, most stocks and shares, most government bonds, most commodities and some unit trusts. They are traded on stock, commodity, futures or options exchanges such as the Singapore Exchange (SGX), the Malaysia Exchange (MYX, formerly known as the Kuala Lumpur Stock Exchange or KLSE), the New York Stock Exchange (NYSE Euronext) and the Chicago Board Options Exchange (CBOE).

OTC (private) financial products and instruments are issued by investment companies and banks. They are essentially private (bilateral) agreements between 2 parties, ie must be bought and sold with the same party, are far less regulated than exchange-traded products, and may not always be liquid investments. Examples include CFDs, Forex (Spot Forex), most unit trusts, preferred stock, state and municipal bonds and some commodities.

An important reason for distinguishing between exchange-traded and OTC products is product pricing. Prices quoted on exchanges are transparent – meaning available for everyone to see – so exchange-traded products are considered more fairly priced (though they do involve paying broker commissions). OTC products are priced by investment companies, banks or brokers at their discretion, so prices tend to be higher for retail purchases and more favourable for the big boys with their higher-volume purchases.

Finally, the term ‘financial products’ is often used interchangeably with ‘financial instruments’, ‘assets’, ‘investments’ and ‘investment products’; at this stage we’ll use ‘financial products’ as a catch-all and won’t split hairs except to point out that we don’t consider our residential property as an investment.

Disclaimer: There can be wide differences within a financial product (notably ETFs). Distinctions between products are also blurring: for example, some unit trusts are now exchange-traded. For these reasons, the comparison above is indicative only.

Notes:

1 Capital Requirement refers to the amount we typically need to invest or trade in the financial product. For example, stock is purchased in lots of 1,000 shares, so an investment in a $4 stock will cost us about $4,000. On the other hand, investing / trading in Singapore Government bonds, CFDs, forex and options can be done with $2,000.

2 Diversification Potential refers to the potential of a financial product to provide risk diversification, ie to ‘put our eggs in different baskets’, assuming minimum account sizes. For example, many unit trusts and ETFs invest in a basket of stocks from different sectors of the economy, thus providing some degree of diversification. With many of the other financial products mentioned here, however, diversification can be achieved only with much higher account sizes.

3 Leverage refers to the use of credit (borrowed money) from a broker or bank. The leverage available varies widely from product to product. Leverage is a double-edge sword: it can magnify both our gains and our losses.

4 Income Potential refers to the potential of a financial product to generate income while we hold the investment; this income can come in the form of interest (for bank deposits and bonds), dividends (for stocks, some Unit Trusts and ETFs), rental (for property) or simply the sales proceeds (options).

5 Public or Private refers to whether the financial product is public (traded on an Exchange) or private (traded Over-The-Counter). For example, Spot Forex trading is popular in Singapore, but traders don’t always realise that it is a private financial product: there are no exchanges for forex, and prices are set by market makers.

6 Liquidity here refers to the number of working days required for a financial product to be converted into cash, without a substantial price discount. For example, the shares we find on stock exchanges are traded in the millions and are highly liquid; proceeds from their sale are realised within 5 working days. Property, clearly, is very illiquid – it typically takes several months to see the proceeds.

7 Charges refers to the amount of fees or charges – commissions, management fees, sales charges, entry fees, stamp duties, etc – that are levied on entering into, maintaining or exiting that investment. Taxes are excluded. For example, management fees are typically 1-3% for unit trusts and 0.3-0.6% for ETFs; total transaction costs (agent commission, stamp duty, legal fees, etc) for investing in private residential property in Singapore come to about 5% (assuming you sell the property only after 5 years).

8 Bank Deposits here refers only to Singapore dollar deposits, the norm for most of us.

9 An Investment-Linked Product (ILP) is an insurance plan that combines protection and investment. The advantage of ILPs is that they offer life insurance.

10 A Unit Trust is a pool of money professionally managed according to a specific, long-term management objective (eg, a unit trust may invest in well-known companies all over the world to try to provide a balance between high returns and risk diversification). The idea here is to gain from the experience and active decision-making of an investment professional.

11 An ETF or Exchange-Traded Fund comes in many different forms: for example, there are equity ETFs that hold, or track the performance of, a basket of stocks (eg Singapore, emerging economies); commodity ETFs that hold, or track the price of, a single commodity or basket of commodities (eg Silver, metals); and currency ETFs that track a major currency (eg Euro). ETFs trade like shares (on stock exchanges such as the SGX), and typically come with very low management fees.

The main difference between ETFs and Unit Trusts is that ETFs are publicly-traded financial products while Unit Trusts are privately-traded financial products, meaning that we can buy and sell ETFs ourselves anytime during market hours.

12 Bonds are a type of product called Fixed-Income that involves lending out money to a government or company; in return we get regular fixed interest payments and eventual repayment of the entire amount lent. The main attraction of government bonds is their safety. However, because there is so little risk, the returns are also much smaller than with other financial products.

13 Forex (Spot Forex or FX) trading refers to the world-wide, decentralised, OTC markets for the trading of currencies. Forex trading has exploded in recent years: average global daily turnover in forex markets in 2010 crossed the $5 trillion mark (that’s $5,000,000,000,000). The main reasons for this are the IT/Internet revolution, allowing trading from home; the 5-day, 24-hour operation of the markets; the huge leverages (credit) typically available; and the relative simplicity of forex trading.

14 Contracts For Difference (CFDs) are essentially contracts (agreements) between a buyer and a seller stating that the seller will pay the buyer the difference between the purchase price and the price at the end of the contract, of an underlying asset (if the difference is negative, the buyer will pay the seller). CFDs currently exist for stocks and market indexes in Singapore. They mirror the movement of their underlying and require less capital than trading stocks directly (because of the leverage provided).

Because the value of a CFD is derived from something else (the underlying stock or index), CFDs are classified as financial derivatives.

15 ‘Options’, like futures, are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price on or before a specified future date. The underlying asset is usually stock but can also be an ETF, a market index, a currency (forex) or a commodity futures contract. Options trading has 2 unique features: we know our maximum risk, ie the maximum amount of money we can lose, from the start of the trade; and options are the only instrument that allows us to make money in all market conditions (rising prices, falling prices and sideways-moving prices).

Options, like CFDs, are financial derivatives.

16 Commodities used to refer to physical goods such as coffee, corn, soya beans and wheat. Today the term has expanded enormously to include metals (eg, copper, gold, silver); energy (eg, crude oil, natural gas); currencies (eg, the British Pound, the Euro, the Japanese Yen, the US Dollar); and financial constructs such as stock-market indexes and interest rates (eg, the S&P 500 Index, 30-Year US-Government Bonds).

Commodity Futures are contracts to buy or sell a certain quantity of a commodity of standardised quality at a fixed price at a specified future date. Futures markets started as a way for producers and consumers to hedge their risk (from unexpected future price falls or rises), but today the markets are dominated by traders who try to make money from price movements.

Commodity futures are another type of financial derivative since they are based on a physical or financial underlying commodity.

Conclusion

This article has tried to provide a glimpse of the great variety of markets and financial products and instruments available, whether for investing or trading.

Many of these markets have become arenas of feverish speculative activity. Several of these products and instruments have been the vehicles of huge fortunes made – and lost. Some have been charged as the culprits behind modern market crashes.

None of these is any reason to shoot the messenger. Our perennial philosophy of risk management and diversification is best practised by understanding how these financial products and instruments work, then using them to grow our wealth in good times, create our wealth in uncertain times and protect our wealth in bad times.

Compare Cheap Car Insurance For Peace of Mind

Every state in the United States requires that you carry car insurance on any registered vehicle. The cost of car insurance not only varies from state to state but even from city to city and is determined by your driving record, age, credit history in conjunction with the amount of accidents that occur in the city that you live in annually and the miles that you have to drive each day (higher miles = increased chance of accident). Even if you live in an area where car insurance is more expensive, this does not mean that you will be unable to find cheap  insurance, in fact you can compare cheap  insurance anywhere by using quote tools. When you compare cheap car insurance on the Internet you are saving yourself both time and hassle. This is because when you call an insurance company’s office, or if you choose to go from site to site trying to get a quote, you will have to answer a lot of questions, the same questions, over and over again.

Using a quote tool to compare cheap car insurance means that you fill out that information one time and the quote tool then submits your information to several well established and reputable insurance companies. You get a quote from each company instantly and you are able to compare the insurance information side by side without have to switch back and forth between pages, and without having to make a commitment. Insurance offers you protection both for your car and for the individuals involved in an accident.

If you are the cause of an accident that involves late model cars and includes injuries, the cost for damages can be astronomical, and if you are one of those people who live in a Torte state (this means you can be sued if you don’t have insurance or if you don’t have enough insurance) then it is even more important that you carry all the car insurance that you can afford. If you compare cheap car insurance you can feel confident that you are getting the most bang for your buck and giving yourself maximum protection in the process.

How to Compare Cheap Car Insurance Online

If you are looking to find cheapest possible deal for car insurance, you absolutely must compare the prices from multiple insurance providers. This is the only way for you to make absolutely sure that you do not pay too much for your insurance policy.

How Do You Start Comparing Cheap Car Insurance Online?

It really is so simple to find the insurance company with the cheapest prices that anybody can do it. All you have to know is how to use the internet and if you have found your way over here, you obviously already master that skill. The process of comparing prices for your insurance online is completely free of charge and you get the results immediately.

You start by putting down some information about you, your vehicle and your driving records on a short online form. After this you will receive a list of car insurance quotes from multiple insurance providers. Now from this list it’s very easy for you to compare that which of the companies can provide you the cheapest prices for your car insurance policy.

Why do you need to fill in that information? Well, naturally the insurance companies give different prices for different people. Your age and the type of your car are definite factors when the insurance providers are trying to determine that what prices can they offer for you. Your driving records can also have an affect on the price of your auto insurance policy and that’s why most companies wish to know that.

Top 5 Tips for Getting Cheap Car Insurance

Buying cheap car insurance is not just about getting the lowest premiums. You also need to make sure you are getting the cover and service you need. To help you find the best cheap car insurance deals here are 5 top tips.

1. Compare Quotes

Don’t just renew your insurance with your current provider. Shop around and get at least 3 or 4 quotes from different insurance companies. This will allow you to compare prices and find a better deal. You could save over 25% on your premiums by shopping around and this is easy to do online. There are a number of excellent websites that can offer you fast and effective ways to compare cheap car insurance deals from a multitude of different providers.

2. Choose the Right Cover

With any insurance product the more cover you want the more you will have to pay. If you want to get cheap car insurance you may have to compromise on cover. Insurers offer flexible policies that do allow you to pick and choose some of the elements of cover. You will need to make a quick list of the essential cover you need and be prepared to go without some of the extras if they add too much to the overall costs. Optional extras can include:

Courtesy Car – if you rely on your car for work then you may need this addition to your policy. The insurance company will provide you with a car whilst yours is off the road for repairs. However this option could add quite a bit to your overall insurance costs so only choose this if really necessary.

Breakdown Assistance – most people have separate breakdown cover these days (often provided with bank and credit card accounts) so check you are not over-insuring yourself by paying for this on your car insurance policy as well.

3. Annual Payments

The majority of insurance companies charge you interest if you pay your premiums in installments. This means in most cases you will save money simply by paying a single annual payment upfront. This is one quick and easy way to get cheap car insurance.

4. Security

You can reduce the risk associated with your car by making sure it is secure. This can include adding an alarm and immobilizer and parking it in a secure place (private driveway or garage). This can help you to get cheap car insurance deals.

5. Mileage Figures

Insurers frequently ask you how many miles you do on average in the year. This will only need to be an approximation but in general the more miles you do the higher your premiums could be. Try cutting out on any unnecessary trips and walking or cycling shorter distances. Not only will this cut down on fuel bills but it could also help you to get cheap car insurance as well.