What is an Investment Product?

▪ It is a product offered to investors based on an underlying security or group of

securities that is purchased with the expectation of earning a favorable return.
▪ It is the collective term for all the types of investments individual and institutional
investors can access in the market.
The types of investment products available for individual and institutional
investors can differ significantly, but their motive behind each investment is to earn
profit. Thus, a wide range of investment products exist to help investors meet their
short-term and long-term investment goals. To wrap it up, investors acquire
investment products for their capital appreciation potential and income-paying
distributions.
Every investment product has its own general set of features including level of
risk and anticipated returns. Risk means how safe your money will be and return is
how fast your money will grow. Normally, as an investment risks rise, the investors
seek higher returns. Thus, being careful is a must, as you can lose all the money
you invest, including the principal.
Aside from risks and returns, the following are also being considered when
deciding what types of investment products to invest in:
➢ Fees. How much it costs to invest
➢ Asset Allocation. Diversification of your overall financial situation.
➢ Liquidity. How easy it is to buy and sell the product.
➢ Fraud. Potential for investment fraud.

Five Questions to Ask Before Investing:

1. Is the seller licensed?
Research shows that con-artists are experts at the art of persuasion, often
using a variety of influence tactics tailored to the vulnerabilities of their victims.
Smart investors check the background of anyone promoting an investment
opportunity, even before learning about opportunity itself.

2. Is the investment registered?

Any offer or sale of securities must be registered with the SEC or exempt
from registration. Registration is important because it provides investors with
access to key information about the company's management, products, services,
and finances. Smart investors always check whether an investment is
registered.

3. How do the risks compare with the potential rewards?

The potential for greater returns comes with greater risk. Understanding
this crucial trade-off between risk and reward can help you separate legitimate

1
 opportunities from unlawful schemes as many investment frauds are pitched as
high return opportunities with little or no risk.
Investments with greater risk may offer higher potential returns, but they
may expose you to greater investment losses. Keep in mind every investment
carries some degree of risk and no legitimate investment offers the best of both
worlds.

4. Do you understand the investment?

Many successful investors follow this rule of thumb: Never invest in
something you don’t understand. Be sure to always read an investment’s
prospectus or disclosure statement carefully. If you can’t understand the
investment and how it will help you make money, ask a trusted financial
professional for help. If you are still confused, you should think twice about
investing.

5. Where can you turn for help?

Whether checking out an investment professional, researching an
investment, or learning about new products or scams, unbiased information can
be a great advantage when it comes to investing wisely. Make a habit of using
the information and tools on securities regulators’ websites.

Classification and Examples of Investment Products

The main categories of investment products are:

✓ Stock
▪ Stocks also are called “equities.”
▪ Stocks are a type of security that gives stockholders a share of ownership in a
company.
▪ Investors buy stocks for various reasons:
➢ Capital appreciation, which occurs when a stock rises in price
➢ Dividend payments, which come when the company distributes some of its
earnings to stockholders
➢ Ability to vote shares and influence the company
▪ Companies issue stock to get money for various things, which may include:
➢ Paying off debt;
➢ Launching new products or expanding into new markets or regions;
➢ Enlarging facilities or building new ones

2
 ▪ There are two main kinds of stocks:
➢ Common stock. These entitles owners to vote at shareholder meetings and
receive dividends.
➢ Preferred stock. These usually don’t have voting rights but they receive
dividend payments before common stockholders do, and have priority over
common stockholders when assets are liquidated due to bankruptcy.

▪ Common and preferred stocks may fall into one or more of the following
categories:
➢ Growth stocks. These have earnings growing at a faster rate than the
market average; rarely pay dividends; and investors buy them in the hope of
capital appreciation. (ex. a start-up technology company)
➢ Income stocks. These pay dividends consistently. Investors buy them for
the income they generate. (ex. established utility company)
➢ Value stocks. These have a low price-to-earnings (PE) ratio – they are
cheaper to buy than stocks with a higher PE. It may be growth or income
stocks, and their low PE ratio may reflect the fact that they have fallen out of
favor with investors for some reason. Investors buy these in the hope that
the market has overreacted and that the stock’s price will rebound.
➢ Blue-chip stocks. These are shares in large, well-known companies with a
solid history of growth. They generally pay dividends.

✓ Bonds
▪ A bond is a debt security, like an IOU.
▪ Borrowers issue bonds to raise money from investors willing to lend them
money for a certain amount of time.
▪ Investors buy bonds because:
➢ bonds pay interest on a regular schedule, such as every six months;
➢ bonds are a way to preserve capital while investing;
➢ bonds can help offset exposure to more volatile stock holdings.
▪ Companies, governments and municipalities issue bonds to:
➢ get money for providing operating cash flow;
➢ finance debt;
➢ funding capital investments.

▪ 3 main types of bonds

1. Corporate bonds. These are debt securities issued by private and public
corporations.
Corporate bonds can either be:
o Investment-grade. Bonds that have a higher credit rating, implying

3
 less credit risk, than high-yield corporate bonds.
o High-yield. These bonds have a lower credit rating (may be issued by
companies characterized as highly leveraged or those experiencing
financial difficulties), implying higher credit risk, therefore, offer higher
interest rates in return for the increased risk.

Corporate bonds can also be grouped according to the type of interest

payments they offer.
o Fixed rate. Interest payments are called coupon payments, and the
interest rate is called the coupon rate. The coupon payments stay the
same regardless of changes in market interest rates.
o Floating rates. Interest payments are reset periodically, such as every
six months. These bonds adjust their interest payments to changes in
market interest rates. Floating rates are based on a bond index or
other benchmark. For example, the floating rate may equal the interest
rate on a certain type of Treasury bond plus 1%.
o Zero-coupon bonds. These type of bond makes no interest payments
until the bond matures. The bond makes a single payment at maturity
that is higher than the initial purchase price.

Corporate bondholders will have a claim on the company's assets and

cash flows in case a company defaults on its bonds payment and goes
bankrupt and are grouped according to its priority of claim.
o Secured bond. The company pledges specific collateral as security for
the bond. With this, if the company defaults, holders of secured bonds
will have a legal right to foreclose on the collateral to satisfy their
claims.
o Unsecured or Debenture bond. These are bonds that have no
collateral pledged to them and are further classified as to senior and
junior (subordinated) debenture. Thus, during defaults or bankruptcy,
holders of senior debentures will have a higher priority claim on the
company's assets and cash flows than holders of junior debentures.

2. Municipal bonds, called “munis,” are debt securities issued by states,

cities, and other government entities. Types of “munis” include:
o General obligation bonds. Refers to bonds issued that are payable
from either an issuer’s general fund or specific taxes (usually property
tax). General obligation bonds are often said to entail the “full faith and
credit” of the issuer.
o Revenue bonds. Instead of taxes, these bonds are backed by

4
 revenues from a specific project or source, such as highway tolls or
lease fees. Some revenue bonds are “non-recourse,” meaning that if
the revenue stream dries up, the bondholders do not have a claim on
the underlying revenue source.
o Conduit bonds. Governments sometimes issue municipal bonds on
behalf of private entities such as non-profit colleges or hospitals. These
“conduit” borrowers typically agree to repay the issuer, who pays the
interest and principal on the bonds. If the conduit borrower fails to
make a payment, the issuer usually is not required to pay the
bondholders.

3. U.S. Treasuries are issued by the U.S. Department of the Treasury on

behalf of the U.S. government. They carry the full faith and credit of the
U.S. government, making them a safe and popular investment.
Types of U.S. Treasury debt include:
o Treasury Bills. Short-term securities maturing in a few days to 52
weeks
o Notes. Longer-term securities maturing within ten years
o Bonds. Long-term securities that typically mature in 30 years and pay
interest every six months
o TIPS. Treasury Inflation-Protected Securities are notes and bonds
whose principal is adjusted based on changes in the Consumer Price
Index. TIPS pay interest every six months and are issued with
maturities of five, ten, and 30 years.

✓ Mutual Funds and ETFs (Exchange Traded Fund)

▪ How Mutual Funds works
➢ A mutual fund is an open-end investment company or fund.
➢ It continuously pools money from many investors and invests the money in
stocks, bonds, money market instruments, other securities, or even cash.
➢ Traditional and distinguishing characteristics of mutual funds:
o Mutual funds generally sell and purchase their shares on a continuous
basis, or until they reach a certain level of assets under management.
o Investors purchase shares in the mutual fund from the fund itself, or
through a broker for the fund. Investors cannot purchase the shares from
other investors on a secondary market.
o Mutual fund shares are redeemable. This means that when mutual fund
investors want to sell their fund shares, they sell them back to the fund
or to a broker acting for the fund.
o Mutual funds are registered with the SEC and subject to SEC regulation.

5
 In addition, the investment portfolios of mutual funds typically are
managed by separate entities known as investment advisers that are
also registered with the SEC.

▪ How ETFs works

➢ ETFs are SEC-registered and are generally structured as open-end funds
but can also be structured as UITs.
➢ Unlike mutual funds, however, ETFs do not sell individual shares directly to,
or redeem their individual shares directly from, retail investors. Instead, ETF
shares are traded throughout the day on national stock exchanges and at
market prices that may or may not be the same as the NAV (Net Asset
Value) of the shares.
➢ ETF sponsors enter contractual relationships with one or more Authorized
Participants—financial institutions which are typically large broker-dealers.
➢ Typically, only Authorized Participants purchase and redeem shares directly
from the ETF which can be done only in large blocks (e.g., 50,000 ETF
shares) commonly called creation units, and they typically “pay” for the
creation units in an in-kind exchange with a group or basket of securities
and other assets that generally mirrors the ETF’s portfolio.
➢ Authorized Participant may sell the ETF shares in the secondary market to
investors.

▪ Different Types of Mutual Funds and ETFs

➢ Bond Funds. Bond funds invest primarily in bonds or other types of debt
securities.
➢ Stock Funds. Stock funds invest primarily in stocks, which are also known
as equities.
➢ Balanced Funds. Balanced funds, also known as asset allocation funds,
invest in stocks and bonds and sometimes money market instruments to
reduce risk but still provide capital appreciation and income.
➢ Target Date Funds. Also called target date retirement funds or lifecycle
funds, these funds also invest in stocks, bonds, and other investments
which are designed to be long-term investments for individuals with
particular retirement dates in mind.
➢ Alternative Funds. Sometimes called alt funds or liquid alts – are funds that
invest in alternative investments such as non-traditional asset classes (e.g.,
global real estate or currencies) and illiquid assets (e.g., private debt) and/or
employ non-traditional trading strategies (e.g., selling short).
➢ Smart-Beta Funds. These funds are index funds with a twist. They
compose their index by ranking stock using preset factors relating to risk

6
 and return, such as growth or value, and not simply by market capitalization
as most traditional index funds do.
➢ Esoteric ETFs. Esoteric or exotic funds are ETFs that focus on niche
investments or narrowly focused strategies.
➢ Money Market Funds. Money market funds are a type of mutual fund that
has relatively low risks compared to other mutual funds and ETFs (and most
other investments).
o A Government Money Market Fund is a money market fund that invests
99.5% or more of its total assets in cash, government securities and/or
repurchase agreements that are collateralized solely by government
securities or cash.
o A Retail Money Market Fund is a money market fund that has policies
and procedures reasonably designed to limit all beneficial owners of the
money market fund to natural persons.

✓ Insurance Products
▪ Annuities.
➢ A contract between you and an insurance company that requires the insurer
to make payments to you, either immediately or in the future. Usually,
people look to annuities to “insure” their retirement and to receive periodic
payments once they no longer receive a salary.
➢ There are two phases to annuities:
o Accumulation phase. You make payments that may be split among
various investment options.
o Payout phase. You get your payments back, along with any
investment income and gains. You may take the payout in one lump-
sum payment, or you may choose to receive a regular stream of
payments, generally monthly.
➢ Annuities provide three things:
o Periodic payments for a specific amount of time. This may be for the
rest of your life, or the life of your spouse or another person.
o Death benefits. If you die before you start receiving payments, the
person you name as your beneficiary receives a specific payment.
o Tax-deferred growth. You pay no taxes on the income and investment
gains from your annuity until you withdraw the money.
➢ 3 basic types of annuities:
o Fixed annuity. The insurance company promises you a minimum rate
of interest and a fixed amount of periodic payments.
o Variable annuity. The insurance company allows you to direct your
annuity payments to different investment options, usually mutual funds.

7
 Your payout will vary depending on how much you put in, the rate of
return on your investments, and expenses.
Features of variable annuities:
1. Variable annuities have insurance features. Insurance features
include: a guarantee that your beneficiary will receive at least a
specified amount if you die before the insurance company starts
making income payments to you; promising you a certain account
value; or giving you the ability to make withdrawals up to a certain
amount each year for the rest of your life.
2. Variable annuities are tax deferred. You pay no federal taxes on the
income and investment gains from your annuity until you make a
withdrawal, receive income payments, or a death benefit is paid.
You may also transfer your money from one investment option to
another within a variable annuity without paying federal tax at the
time of the transfer. However, there are times when the benefits of
tax deferral may outweigh the costs of a variable annuity only if you
hold it as a long-term investment.
3. Variable annuities let you receive periodic income payments for a
specified period or the rest of your life (or the life of your spouse)
known as annuitization. This feature offers protection against the
possibility that you will outlive your assets.
o Indexed annuity. This annuity combines features of securities and
insurance products. An indexed annuity generally promises to provide
returns linked to the performance of a market index.

▪ Variable Life Products.

➢ A contract between you and an insurance company that is intended to meet
certain insurance needs, investment goals, and tax planning objectives.
➢ It is a policy that pays a specified amount to your family or other
beneficiaries upon your death.
➢ It also has a cash value that varies according to the amount of premiums
you pay, the policy’s fees and expenses, and the performance of a menu of
investment options—typically mutual funds—offered under the policy.

✓ Certificates of Deposit (CDs)

▪ A certificate of deposit (CD) is a savings account that holds a fixed amount of
money for a fixed period of time and in exchange, the issuing bank pays
interest.
▪ CDs are considered to be one of the safest savings options.
▪ Most CDs are purchased directly from banks, but there are also brokerage

8
 firms and independent salespeople who also offer “brokered CDs”, they are
known as “deposit brokers”. These individuals or entities negotiate a higher
rate of interest for a CD by promising to bring a certain amount of deposits to
the institution thereby offering these CDs to their customers.

✓ Commodities
▪ Commodity futures contracts are an agreement to buy or sell a specific
quantity of a commodity at a specified price on a particular date in the future.

✓ Options and Derivatives

▪ Options
➢ Options are contracts giving the purchaser the right – but not the obligation,
to buy or sell a security at a fixed price within a specific period of time.
▪ Derivatives
➢ Derivatives are investment products that are offered based on the
movement of a specified underlying asset.

✓ Real Estate Investment Trusts (REITs)

▪ A REIT is a company that owns and typically operates income-producing real
estate or related assets.
▪ It allows individuals to invest in large-scale, income-producing real estate.
▪ Unlike other real estate companies, a REIT does not develop real estate
properties to resell them. Instead, a REIT buys and develops properties
primarily to operate them as part of its own investment portfolio.
▪ How to buy and sell REITs
➢ You can invest in a publicly traded REIT, which is listed on a major stock
exchange, by purchasing shares through a broker.
➢ You can purchase shares of a non-traded REIT through a broker that
participates in the non-traded REIT’s offering.
➢ You can also purchase shares in a REIT mutual fund or REIT exchange-
traded fund.

What are Investment Tools?

Investment Tools are indispensable instruments that empower individuals to
navigate the complicated financial markets and make informed decisions regarding
their investments. They are a diverse range of resources, platforms, and applications
designed to aid investors in various aspects of their investment journey.
These Tools serve as bridges between investors and the intricate financial
landscape, offering insights, analysis, and efficiency that traditional methods often
struggle to provide. From online brokerage platforms that facilitate seamless trading

9
of stocks, bonds, and other assets, to robo-advisors, these Tools cater to a wide
spectrum of investor needs.
Today, these Tools have become the backbone of modern Wealth
Management. They empower both beginners and seasoned investors to make
strategic choices, optimize their portfolios, and respond effectively to market trends.
Utilizing these Tools not only streamlines processes but also enhances the likelihood
of achieving financial goals while minimizing potential risks.

Examples of Investment Tools

1. Online brokerage platforms

Online brokerage platforms have revolutionized the way individuals invest
in financial markets. These platforms offer a convenient way to buy and sell a
number of financial instruments, including stocks, bonds, commodities, and
more. They present investors with access to real-time market data, research
tools, and educational resources that empower them to make informed decisions.
Moreover, online brokerages often offer different types of accounts, such
as individual and retirement accounts, catering to various Investment goals. With
their intuitive interfaces and secure transaction capabilities, online brokerage
platforms have democratized investing, enabling individuals to take control of
their financial future.

2. Robo-advisors
Robo-advisors are a boon for investors seeking a hands-off approach to
portfolio management. These automated platforms use algorithms and advanced
data analysis to create a diversified Investment portfolio tailored to your risk
tolerance and financial goals.
Robo-advisors continuously monitor the market, automatically rebalance
your portfolio, and make adjustments based on changing market conditions. This
not only saves time but also ensures that your Investments align with your
strategy. Robo-advisors have democratized professional portfolio management,
making it accessible to investors with varying levels of expertise, Moreover, they
provide a cost-effective alternative to traditional financial advisors.

3. Stock screeners
For investors looking to handpick individual stocks, stock screeners are
invaluable tools. These Investment tools allow users to filter stocks based on
specific criteria, such as market capitalization, price-to-earnings ratio, dividend
yield, and more.

10
 Stock screeners enable investors to quickly identify companies that match
their Investment criteria, streamlining the research process and helping to
uncover potential opportunities. By providing a customizable way to scan through
thousands of stocks, stock screeners aid investors in building a portfolio that
aligns with their Investment goals and risk appetite.

4. Financial news aggregators

Staying informed is paramount in the dynamic world of investing, and
financial news aggregators play a pivotal role in this. These platforms gather
news from various reliable sources, curating articles on market trends, economic
indicators, company earnings, and geopolitical events that impact financial
markets.
By having all the relevant news in one place, investors can swiftly grasp
the factors driving market movements and adjust their strategies accordingly.
Financial news aggregators are particularly valuable for traders who need to
respond swiftly to breaking news that can trigger volatility.

5. Portfolio tracking applications

In the pursuit of building a successful Investment portfolio, diligent
monitoring is essential. Portfolio tracking applications offer investors an insightful
overview of their holdings' performance. They allow users to consolidate all their
Investments in one place, irrespective of asset class.
These apps offer features like real-time price tracking, performance
analytics, and asset allocation breakdowns. This enables investors to make data-
driven decisions, rebalance portfolios, and maximize returns. Portfolio tracking
applications provide a comprehensive snapshot of an investor's financial position
and aid in identifying areas that may require adjustments to align with Investment
goals.

6. Investment forums and communities

"Knowledge is power" holds true in the world of investing. Investment
forums and online communities provide a platform for investors to share
experiences, insights, and strategies. Engaging in discussions with fellow
investors can expose individuals to diverse perspectives and new Investment
ideas.
These platforms foster a collaborative learning environment where
beginners can seek advice from experts, and experienced investors can refine
their strategies through healthy debates. While it's important to critically evaluate
information found in such forums, they offer a valuable opportunity for investors
to tap into collective wisdom and stay attuned to market trends.

11
7. Cryptocurrency exchanges
Cryptocurrency exchanges serve as the gateway to the world of digital
assets. These platforms facilitate the buying, selling, and trading of
Cryptocurrencies like Bitcoin, Ethereum, and other altcoins. They provide users
with a secure and accessible way to enter the cryptocurrency market.
Cryptocurrency exchanges present a variety of trading pairs and market
analysis tools, and often feature advanced trading options. However, due
diligence is crucial when choosing an exchange, as security and regulatory
compliance vary. Cryptocurrency exchanges are essential for investors
interested in diversifying their portfolios with this emerging asset class.

8. Real estate crowdfunding platforms

Real estate has historically been a lucrative Investment, but direct
ownership often requires substantial capital. Real estate crowdfunding platforms
address this barrier by allowing investors to pool their funds to invest in property
projects. These platforms provide access to a range of real estate opportunities,
from residential developments to commercial properties.
Investors can contribute a relatively small amount and expose themselves
to the real estate market with the exception of the responsibilities of property
management. Real estate crowdfunding combines convenience and
diversification, making it an attractive option for those looking to participate in the
real estate market without the traditional barriers to entry.

9. Retirement calculators
Retirement calculators simplify the process of determining how much you
need to save. These tools consider factors like current savings, expected annual
contributions, desired retirement age, and estimated lifespan to calculate the
required savings amount.
Retirement calculators help individuals set realistic retirement goals and
design Investment strategies to achieve them. By adjusting variables, users can
visualize the impact of different scenarios on their retirement funds. These
calculators provide a clearer roadmap for financial planning and aid in making
informed decisions to secure a comfortable retirement.

10. Tax-efficient Investment accounts

It's essential to consider the tax implications of your decisions, thus, tax-
efficient investment accounts are tools designed to minimize the tax impact on
your returns. These accounts, often offered by governments to encourage long-

12
 term savings and investment, come with specific tax advantages that can
enhance your overall gains.
One common example is the Individual Savings Account (ISA) in the UK.
ISAs allow individuals to invest up to a certain annual limit without paying income
tax or capital gains tax on the returns generated within the account. This can
significantly boost your growth over time.
These accounts can be especially advantageous for individuals in higher
tax brackets, as they provide a means to shield a portion of your returns from
taxation. Thus, they allow you to compound your gains more effectively over the
long term.

What Are Alternative Investments?

➢ An alternative investment is a financial asset that does not fall into one of the
conventional investment categories - stocks, bonds, and cash.
➢ Alternative investments can include private equity or venture capital, hedge
funds, managed futures, art and antiques, commodities, and derivatives
contracts. Real estate is also often classified as an alternative investment.

➢ Key characteristics:
▪ They're more lightly regulated than traditional investments.
▪ They're illiquid - they can’t be easily sold or converted to cash.
▪ They have a low correlation to standard asset classes - they don’t necessarily
move in the same direction as other assets when market conditions change.

Types of Alternative Investments

1. Private Equity

Private equity refers to capital investment made into private companies, or

those not listed on a public exchange, such as the New York Stock Exchange. An
important part of private equity is the relationship between the investing firm and the
company receiving capital, since, they often provide more than just capital to the

13
firms they invest in. They also provide benefits like industry expertise, talent sourcing
assistance, and mentorship to founders.
Subsets of private equity, includes:
▪ Venture capital – which focuses on startup and early-stage ventures
▪ Growth capital – which helps more mature companies expand or restructure
▪ Buyouts – when a company or one of its divisions is purchased outright

B. Private Debt
Private debt refers to investments that are not financed by banks (i.e., a bank
loan) or traded on an open/public market, and are instead provided by private
markets. The “private” part of the term refers to the investment instrument itself,
rather than the borrower of the debt, as both public and private companies can
borrow via private debt.
The distinction between private debt and private equity is that capital is
provided via a loan rather than buying a share of the company’s equity. Returns
therefore come through interest payments and the return of the principal.
The returns from private debt are more favorable compared to those of public
debt. Understandably investors want to be compensated for the illiquidity features
when there is no tradable market for their investment. This means private debt
investments tend to pay higher yields which is known as the ‘illiquidity’ premium.

C. Hedge Funds
Hedge funds are investment funds created by accredited investors that trade
relatively liquid assets and employ various investing strategies with the goal of
earning a high return on their investment. It is a private investment partnership
between a fund manager and the investors of the fund, often structured as a limited
partnership or limited liability company which operates with little to no regulation
from the Securities and Exchange Commission (SEC).
General Types of Hedge Funds
▪ Open-ended hedge funds - shares are continuously issued to investors and
allow periodic withdrawals of the net asset value for each share.
▪ Closed-end hedge funds - issue only a limited number of shares through an
initial offering and do not issue new shares even if investor demand
increases.
▪ Shares of listed hedge funds - are traded on stock exchanges and non-
accredited investors may purchase the shares.

The main hedge fund strategies are as follows:

a. Global macro strategies - managers make bets based on major global
macroeconomic trends (such as moves in interest rates, currencies); and use
discretionary and systematic approaches in trading currencies, futures,
options contracts, and traditional equities and bonds.

14
 b. Directional hedge fund strategies - managers bet on the directional moves of
the market (long or short) as they expect a trend to continue or reverse for a
period of time.
c. Event-driven hedge fund strategies - are used in situations wherein the
underlying opportunity and risk are associated with an event - finding
investment opportunities in corporate transactions such as acquisitions,
consolidations, recapitalization, liquidations, and bankruptcy.
d. Relative value arbitrage strategies - taking advantage of the relative price
discrepancies between different securities whose prices the manager expects
to diverge or converge over time.
e. Long/short strategies - managers make what are known as “pair trades” to bet
on two securities in the same industry. For example, if they expect Coke to
perform better than Pepsi, they would go long Coke and short Pepsi.
Regardless of overall market trends, they will be okay as long as Coke
performs better than Pepsi on a relative basis.
f. Capital structure strategies - taking advantage of the mispricing of securities
up and down the capital structure of one single company. For example, if they
believe the debt is overvalued, then they short the debt and go long the
equity, thus creating a hedge and betting on the eventual spread correction
between the securities.

4. Real Estate
Real estate is the most common type and the world’s biggest asset class.
Land, timberland, and farmland are all real assets, so as intellectual property like
artwork.
In addition to its size, real estate has characteristics similar to bonds –
because property owners receive current cash flow from tenants paying rent; and
equity – because the goal is to increase the long-term value of the asset, which is
called capital appreciation.
Asset valuation is a challenge in real estate investing. Real estate valuation
methods include income capitalization, discounted cash flow, and sales comparable,
with each having both benefits and shortcomings. To become a successful real
estate investor, it’s crucial to develop strong valuation skills and understand when
and how to use various methods.
Real estate investing can be done through:
• Real estate investment trusts (REITS)
• Residential or commercial rental property
• Land for rent or land in anticipation of development

15
5. Commodities
Commodities are assets and mostly natural resources, such as agricultural
products – oil, natural gas, and precious and industrial metals that are needed by
large manufacturing companies in running their businesses. Commodities are
considered a hedge against inflation, as they're not sensitive to public equity
markets. Additionally, the value of commodities rises and falls with supply and
demand – higher demand for commodities results in higher prices, thus, investor
profit.
Types of Commodities
a. Agricultural commodities – such as coffee, corn, sugar, soybeans and wheat
b. Livestock - includes cattle, sheep, swine, goats, and poultry
c. Energy commodities – include crude oil used in transportation activities,
natural gas used for electricity generation, and gasoline, which powers light-
duty trucks and cars.
d. Metals – include gold, silver, and copper

6. Collectibles
Some investments may double as a hobby – with art, sports memorabilia,
entertainment memorabilia, or other collectibles acting as alternative investments.
These items may have historical worth or develop worth over time as related parties
(the artist, movie star, athlete or associated person) become more historic.
Collectibles include a wide range of items such as:
Rare wines Stamps Vintage cars
Fine art Mint-condition toys Coins
Baseball cards
Investing in these means purchasing and maintaining physical items with the
hope the value of the assets will appreciate over time.
These investments may sound more fun and interesting than other types, but
can be risky due to the high costs of acquisition, a lack of dividends or other income
until they're sold, and potential destruction of the assets if not stored or cared for
properly. The key skill required in collectibles investment is experience; you have to
be a true expert to expect any return on your investment.

7. Structured Products
Structured products involve fixed income markets – those that pay investors
dividend payments like government or corporate bonds; and derivatives or securities
– whose value comes from an underlying asset or group of assets like stocks,
bonds, or market indices. Examples of structured products include credit default
swaps (CDS) and collateralized debt obligations (CDO).
Structured products can be complex and sometimes risky investment
products, but offer investors a customized product mix to meet their individual

16
needs. They're most commonly created by investment banks and offered to hedge
funds, organizations, or retail investors.

Examples of Alternative Investments Strategies

1. Long/short Equity – long and short portfolios hold sizeable stakes in both
long and short positions; and seeks to profit from stock gains in the long
positions or stock price declines in the short positions.
2. Long/short Credit – seeks to profit from changes in credit conditions of
individual bond issuers and credit market segments represented by credit
indexes.
3. Market Neutral – attempts to reduce systematic market risk created by
factors such as exposure to sectors, market-cap ranges, investment styles,
currencies, and/or countries. Often achieved by matching short positions
within each area against long positions.
4. Managed Futures – trades global futures, options, swaps and foreign
exchange contracts using trend-following or price-momentum strategies.
5. Volatility – trades volatility as an asset class. It can be directional volatility
strategy, profiting from the trend in the implied volatility embedded in
derivatives referenced to other assets; or volatility arbitrage, which profits
from the implied volatility discrepancies between related securities.
6. Macro Strategies – are predicated on movements in underlying economic
variables and the impact of these have on equity, fixed income, hard currency
and commodity markets.
7. Multi-alternative Strategies – offer investor exposure to several different
alternative investment tactics.

The Pros and Cons of Alternative Investments

Pros Cons
• May offer diversification benefits • Often associated with higher fees
• Often have higher return potential and transaction costs
than traditional investments • Often have higher risk than
• May offer protection against traditional investments
inflation • Often lacks transparency and may
• May offer investors more specialty have reduced regulation
investment options • May not be right for novice
• May be less liquid and more investors due to their complexity
difficult to sell in a hurry • May be illiquid

17