The Basics: Investment Products
The following list is intended to give you an overview about investment products. Since there are relatively few boundaries that apply to financial services providers with regard to product design, it is possible that you may encounter products that are not listed below, in which case it is important to read the content of the contract thoroughly, and to remember the principle that the higher the prospects for returns are, the greater the risk of a (total) loss also will be.
Banks offer various savings products for setting aside currently spare funds for use at a later date, which differ from one another in terms of the amount deposited or the interest rate that applies of the associated duration of the term for which the money is tied up.
The classical savings book has the form of a certificate, which is issued by the bank to the saver (or depositor or creditor) against a savings deposit (i.e. a cash deposit that is intended to be invested rather than to be used for payment purposes) and which contains a promise to repay the money, or to pay interest upon that money.
Deposit protection applies to savings deposits.
Bonds (also known as debt securities) securitise a claim of the investor (or the subscriber or creditor) to repayment and interest in return for you making the capital available to the issuer of the bond (otherwise known as the obligor). This means that for example you give your money to a bank and become a creditor of this bank. In return the bank is required to bank interest on the money being made available as well as to repay the capital at a fixed date in the future.
The authorised party may trade the bond, and therefore its price may change. A price risk therefore exists.
Depending on the credit quality of the issuer as well as the specific conditions associated with the loan, the level of risk may vary. It should be noted that the credit quality of the obligor, i.e. Its ability to satisfy its financial obligations is of central importance. Credit quality is used to describe the creditworthiness of the company, in order words the company’s ability to return the money both in full and on time.
A share is a security, which securitises a unit in a stock company. Anyone buying a share, therefore becomes a part owner of the stock company. This unit is associated with certain rights, such as participation in a dividend, in the profits of the company that are distributed to the shareholders, or voting rights at the company’s general meeting.
Shares may be traded on a stock exchange, and the value or price of the share may change. The price is determined by supply and demand, with financial development of the stock company, underlying conditions and other factors, such as public opinion, and therefore cannot be predicted with any certainty. Accordingly there is also a risk associated with owning shares in a stock company, which, in the event of the company becoming insolvent may lead to the share being worthless.
An investment fund is made up of the combined assets of a large number of investors. Austrian investment funds pursuant to the Investment Funds Act of 2011 are jointly owned by investors who buy units by means of making a capital contribution. The units are securitised by means of unit certificates or investment certificates as securities.
The capital of the fund is invested in all types of investments, such as shares, bonds or real estate, and the risk thereby diversified, although risk can never be fully ruled out. Investment funds are frequently categorised by the segments in which they are active.
In the case of “open-ended” investment funds, units may be redeemed at any time for the redemption price. It is also possible to trade in units. For this reason the yield of a unit consists in part of the performance of the unit, which can be calculated by dividing the value of the assets in the fund, which cannot be predicted with any certainty in advance, by the number of units issued. In addition there is also the possibility for the distribution of interest or a dividend.
Furthermore, it is necessary to differentiate between income funds and accumulator funds: In the case of an income fund the returns are distributed to the investor, whereas in the case of an accumulator fund, the returns are ploughed back and reinvested into the fund.
In the case of investment funds it is also possible to differentiate between undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs).
The management of investment funds is carried out by management companies that are licenced for this purpose.
Further information can be found at here.
Insurance-based investment products include life assurance, by means of which financial risks relating to human life, such as death or invalidity, are intended to be protected against. However, capital may also be accumulated by taking out a life assurance policy.
Accordingly there is a further differentiation between purely risk-based insurance policies, under which the sum insured only becomes available in the event of an insurance claim event being triggered, prior to the expiry of the insurance policy, and capital accumulating life assurance policies, in which, in addition to protecting against risks, there is a longer-term interest-bearing savings plan.
In the case of such capital accumulating life assurance products, it is also necessary to differentiate between classical life assurance products, where a guaranteed level of interest is arranged, and fund-based or index-based life assurance, the value of which is dependent on the performance of the invested assets that cannot be predicted. There is therefore an increased risk of a loss in the latter type of life assurance products.
This is a relatively new term used to describe a method for raising capital for differing projects or companies from a broad base of people. This umbrella term is applied to a broad range of different constellations. Participation in profits or interest may be prescribed in return for making capital available.
The raising of capital under crowdfunding may take on very different forms, and therefore under certain circumstances may for example involve an offer that requires a prospectus under the Capital Market Act or may constitute a banking activity that requires a licence.
If alternative financing instruments under the Alternative Financing Act, such as profit participation certificates, silent participations, or specific forms of subordinated loans, are offered, then the issuer will possibly be required to supply an information sheet.
Please also consult the information on crowdfunding models about other forms of participation and financing.