What are financial investments and how do they work?

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Financial lexicon Financial lexicon

An investment consists of the productive use of economic resources. In the financial sector, this can be defined as the stake of a certain amount of money in the financial markets in the form of a financial product. A more comprehensive definition could be as follows: financial investments are the productive use of an asset for a certain period of time with the aim of increasing its value. In this way, mortgage loans can also be classified as financial investments.

There are many types of financial investments. A common thread to orient yourself between them can be to classify them according to duration, risk and return. There are long-term, medium- or short-term investments. Investments can also have a low-, medium- or high-risk profile. The decisive factor for the investor is always the risk/return ratio, i.e. how high will the distribution – whether in the form of dividends or interest – be in relation to the capital invested and the probability of getting it back? On the basis of the statutory provisions (in particular according to MIFID 2), the investment products must be presented to investors as transparently as possible, both from a risk perspective and with regard to fees.

For those looking for safe investments, there are certain forms of investing assets (e.g. the Guaranteed Capital Funds). However, the most common way of protecting yourself from risk is to diversify your investments. Diversifying investments means building an investment portfolio made up of stocks from different markets that may have little or no correlation with one another.

There are many financial service providers that are authorised to offer financial products and therefore enable investments by both companies and private investors. Banks should be mentioned first, but capital management companies and asset management companies shouldn’t be forgotten either. Financial advisors are professionals who are qualified to develop saver-focused and financial product-based investment strategies. They can be employees of banks and companies, work in their own name or be independent.

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