You have finally managed to save a little money and are willing to invest it so that it begins to work for you. As you already know, compound interest can make your money grow without you having to do anything , but for this you have to be very clear in which products you want to deposit your savings. The first step that a person who wants to diversify their investments should take is to learn the differences between fixed income and equities. The preconceptions that fixed income is risk free and that equities are very dangerous are wrong. To dismantle these myths, below we explain everything you need to know about fixed income and equities .
Main differences between fixed income and variable income
What is fixed income
The main characteristics of fixed income are twofold: its low risk and its profitability known in advance . A person who invests in fixed income securities knows that from time to time they will receive interest and that the capital will be returned at maturity. That is, with fixed income we will know in advance what amounts we will receive and at what time.
According to the issuer of the same, we have to differentiate between public fixed income , issued by the State, Autonomous Communities and other public bodies in order to finance their expenses; and private fixed income , issued by companies that increase capital because they need external financing.
The Treasury Bills, the Bonds and the Obligations of the State are public fixed income. Meanwhile, corporate notes,subordinated debentures, covered bonds, and mortgage securities are some examples of private fixed income.
Investments in fixed income can be short-term , with maturities of less than 18 months, such as Treasury Bills or Corporate Notes; or medium and long term , such as bonds and obligations of the State or private companies. The former have great liquidity but little profitability, while the latter are less liquid but offer more succulent returns.
It is important to be clear that fixed income is not as safe as it may seem . All investment products carry risks, and this one is no exception. For example, there is always the risk that the entity that issues the securities will go bankrupt and will not return the money to its investors. There is also the risk that the interest we receive is below the official price of money and this will make us lose purchasing power.
What is equities
Unlike fixed income, this offers investors the opportunity to obtain much higher returns on the investment, although the risks assumed are also greater, since neither the recovery of the investment nor the profitability of the investment is guaranteed. herself . It can also happen that the profitability is negative and that the investor loses the money invested.
Normally, when we talk about equities, we refer to the shares of companies that are listed on the stock market . Since it is impossible to know how these will evolve over time, it is also impossible to know the profitability of our investment.
With investments in variable income, the price of shares varies every day due to political, social, structural factors… For example, the independence crisis in Catalonia is causing many companies listed on the Stock Exchange to flee to other autonomous communities. The reason? Prevent your share price from sinking due to uncertainty and thus prevent your shareholders from losing money.
The most common way to access the equity market is through investment funds, which are savings instruments formed by a large number of investors who deposit their money in assets of different companies seeking to diversify investment and thus minimize risks.
Our advice, whether it is about fixed income or equities, is that before investing, look for an independent advisor who will advise you on the investment products that best suit your risk profile.
