You want to invest your money – what you need to consider!
There is a fundamental rule when investing: high returns are associated with a high risk. The longer the capital is tied up for, the higher the interest rate is as a rule. You should be particularly cautious of promises of high returns, which bear no relation to the normal market returns. You may find the interest rates and exchange rates on the website on the Oesterreichische Nationalbank (OeNB).
First of all, consider what amount you are able to invest
Consider in advance what amount you wish to invest and above all you are able to afford to. In any case check what your savings are, your running costs and how much you have available for unforeseen expenditures. Remember that in some forms of investment your funds are tied up for a longer period of time. Releasing funds early is often associated with costs. Make sure that you also have the product explained in detail in this regard.
There is a fundamental rule when investing: high returns are associated with a high risk. The longer the capital is tied up for, the higher the interest rate is as a rule.
As a guide it is always good to ask about the return that can be obtained from a low risk investment by a blue chip issuer or debt instrument (e.g. government bonds). This is your benchmark. The difference in interest rate of the investment you wish to make compared to this benchmark is a good indicator for the risk that you are taking.
Furthermore, the financial services provider is obliged, to draw up an investor profile for you. This is a self-disclosure in which you should inform the financial services provider about
- Your investment aims,
- Your financial situation, and
- Your knowledge and experiences with investments in securities.
The financial services provider requires your information to be able to make an overall classification, which allows you to be allocated to a target market. Since in the implementation of MiFID II every product is also required to allocated to a target market, it is intended to ensured that the products offered ultimately correspond to your preferences, requirements as well as your risk appetite.
Consider the risk associated with different groups of products
Savings books and building saving are considered to be relative safe. They have a lower yield but greater security. The only risk to bear in mind in the case of a savings book is the risk of insolvency of the bank. In this case, deposit protection applies to savings books and building savings contracts.
- Risk: low
Read more about this in the https://www.fma.gv.at/fma_aktuell/fma-fokus-anleihe-vs-sparbuch/FMA spotlight on Bonds vs Savings Books
Over and above the out and out hedging of risk there is also a more long-term interest bearing savings element. The claims of customers are guaranteed by the cover pool reserve (Deckungsstock). There are two different types of endowment life insurance:
- Classical life insurance: a guaranteed interest rate is usually set in the case of classical life insurance. The risk of a loss is low.
- Funds and index-based life insurance: in the case of fund-based and index-linked life insurance the value depends on the unforeseen performance of the invested assets. In this case there is therefore an increased risk of a loss.
Read more about this in the FMA Focus on Life Insurance
A share is a security that securitises a unit of in the share capital of a stock company. You therefore hold a share in the company.
The price of share is based on supply and demand on the stock exchange and represents the value of the company. When trading in shares the prospects of returns are higher, however there is also a higher potential for losses, and in the worst case a total loss. In addition it should be noted that there are also enormous differences between individual shares with regard to both risk and return.
- Collect information about the company, for example its solvency, company strategy, sector, location of the exchange on which it is traded etc. to assess its risk.
The historical performance of securities and fund-based products provides no indication about their future development.
Bonds are securities with a fixed interest rate. An investor invests their money for a certain period time and receives interest for doing so. At the end of the investment term the investor receives their capital back.
- Risk: The risk of default depends on the credit rating of the issuer. In the event of the insolvency of the issuer, in the worst case scenario a total loss is possible. A prospect of higher earnings means a higher level of risk.
- To assess the risk entailed, collect information about the company, for example its solvency, company strategy, sector, location of the exchange on which it is traded etc. Find out answers to the following questions: How many issuances has the company already made? How many of the company’s issuances are still outstanding and have not been repaid? How high is the total volume that the company will have to repay in the future?
Investment funds are instruments with which capital is usually collected from a number of retail investors, and invested on the financial markets. The capital is primarily invested in the form of transferable securities, as well as deposits at banks, commodities or other investment funds. The investor is the owner of a part of the fund. Depending on their design there are for example money-market funds, pension funds, real estate funds and equity funds.
Make sure in the funds database, that the investment fund is authorised in Austrian for public distribution. In the event that no such authorisation exists, you must be aware that the fund product has not been subjected to an authorisation process, and therefore is not supervised by an authority.
- Risk: The risk entailed in an investment in a fund depends on the investment policy and the respective market development of the assets in the investment fund. It is not possible to exclude a loss.
Unlike classical investment funds, Exchange Traded Funds (ETFs) are passive funds. This means that they do not have fund managers who select the securities in the fund, but instead ETFs typically track a stock market index, for example the ATX, combining all the securities that make up the index. ETFs are traded on the stock exchange. Their price is determined by supply and demand, and corresponds to the total value of the underlying securities. It can be simpler and cheaper for investors to invest in an ETF than buying and selling individual stocks. Furthermore the risk is spread across the broad portfolio due to its diversification. Due to the lack of fund management, the ongoing charges and management fees are also lower than for classical investment funds.
- Risk: ETFs, like shares and bonds, are also subject to price fluctuations.
Derivatives are financial instruments, the performance and price are dependent on the price of other financial instruments (the underlying such as, for example, commodities, interest, currencies, …). Derivatives are used to bet on how the price develops in the future. There are various types of derivatives – for example options, futures, swaps, … – that are fitted with various rights and obligations.
- Risk: The risk entailed in derivatives depends on their design. Please note that they may be highly speculative products, which may lead to a total loss of the invested capital and may even entail obligations to make further contributions.
The FMA Focus on Product Intervention informs you about restrictions and bans of financial products.
Crypto assets are a medium of exchange, that are created, managed and transferred using a mathematical, computer-based procedure. Currently there are already more than 200 different crypto assets offered, with the best known examples being Bitcoin, Ethereum, Ripple and Litecoin.
- Risk: Unlike with traditional currencies, there is no central bank behind crypto assets, which ensures the price level and monetary stability, and for which there large price fluctuations. The value of crypto assets is determined solely on the basis of supply and demand. As a result of high demand a “speculation bubble” might occur, which then bursts as soon as no-one is willing to pay the speculatively high price. The consequence is a large loss of value. Furthermore there are many other risks, about which you can read in the FMA Focus on “Bitcoin & Co”.
Read more about this in the FMA Focus on Bitcoin and Co.
Consider that there are also products offers on the financial market, that lie outside the supervision of the FMA. For further information, please read: