You've probably heard that investment accounts can help you grow your wealth, but with so many options, it can be hard to choose which one is right for you.
There are many different ways to invest your money; financial institutions tailor different accounts to suit different people.
In this guide, you'll read about the different types of investment accounts as well as the benefits and the risks associated with them.
What are investment accounts?
An investment account is a broad term applied to any account that holds cash or investments such as bonds, stocks, ETFs, cryptocurrency or mutual funds.
When you read about investment accounts, it usually means share trading accounts, self managed super fund accounts, term deposits, deeming accounts or retirement accounts.
It's important to note that various types of investment accounts present different risks and returns. Not all of them will be suitable for you, depending on your investment strategy.
What are the different types of investment accounts?
Investment accounts include a number of different financial products. Common types of investment accounts include the following:
Share trading investment accounts. You trade securities by using a share trading account. This type of account has features that will appeal to traders, such as free brokerage. A share trading investment account can also be tailored to suit your needs, for example, an investment account can easily be made into an investment loan if you need more capital.
SMSFs. An SMSF can include a number of accounts: an account for SMSF savings, an account for day-to-day expenses and an account for trading and investing. SMSF investment accounts are offered by most major financial institutions.
Margin loans. A margin loan gives you a line of credit to use to invest. Margin loans can be secured by a property or some other asset, such as a share portfolio. Margin loans can only be used for certain investments, but you can use a margin loan to invest in common types of investment accounts. The downside with margin loans is that your shares can be used as collateral, so if the share price falls, then your shares could be taken by your creditor to cover the loan.
Term deposits. This is one of the safest ways to invest your money. It gives a higher return when you lock your money away for longer periods. There's a penalty if you want to access your money before the term deposit matures and there are bonuses if you continue to invest your money once the first investment matures. Term deposit accounts are common and you can easily compare rates and fees using websites such as finder.com.au
Cash management accounts. A cash management account is also called a high interest savings account. Like a term deposit, this investment account gives you a guaranteed return on your deposit. Unlike a term deposit, you can earn bonus interest for an introductory period or when you meet certain conditions, such as maintaining a minimum monthly deposit, and you can access your money when you want without penalty.
Deeming account/retirement account. This type of investment account is aimed at Australians who are retired or claiming government benefits. Funds in a retirement account accrue interest at a rate tethered to the government's deeming rate — the investment rate of return used to calculate Centrelink benefits. Deeming accounts are offered by most registered deposit taking institutions.
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Consider these points when you compare investment accounts.
Risk profile. In investing, you'll face a trade-off – the higher the risk, the higher the return. Savings accounts and term deposits are among the safest types of investments, whereas share trading has the potential for big gains and losses. Everyone has a different risk appetite. There is a relationship between your risk appetite and your investment goals.
Your investment goals. Why are you investing? What is your time horizon? Is it to grow your retirement nest egg, are you saving for a deposit for a home or are you looking for a quick dollar? Access to capital and risk appetite are 2 important factors in deciding your investment goals and subsequently which investment account is right for you. For example, a high interest saving account is a better investment account for someone saving for their first home than a share trading account. Share trading can lead to big gains, but the chance of losing everything probably won’t appeal to someone saving for their first home. Your investment goals dictate your investment strategy, which is a must-have for anyone comparing investment accounts.
Your investment strategy. Considering your investment goals, which investment account or investment account mix is suited to your needs? You can hedge your bets by choosing the right mix of investments. Your investment strategy also needs a time frame.
The length of the investment. Are your investment goals short, medium or long term? Different investments have different investment cycles. You can invest in a term deposit for a set time. Your goals and time frame to realise those goals should help you make a decision about the best investment account for you.
Liquidity. Also compare different investment accounts based on how easily you can access your money. Savings accounts are among the most liquid type of investment account, you can get your money when you want it. Securities only become a liquid asset if you can find a buyer.
What are the pros and cons of using an investment account?
Pros
Financial gain. Different investments and investment accounts have the potential for different gains. The potential for capital gains is tied to the risk of the investment.
Choice. These types of accounts give you control over how you spend your money. Share trading accounts, retirement accounts, savings accounts and SMSFs are all different types of investment accounts.
Cons
Risk. The risk of suffering a capital loss.
Not for everyone. You need to have done your homework before you start investing and opening an investment account.
How risky are you? The investment risk varies depending on the investment type. Term deposit and high interest savings accounts are basically no-risk investment accounts, but the returns are low compared to the potential for capital gains from trading shares.
Margin lending. A margin loan investment account can be a great way to get capital to invest; however, this is a risky way to access cash. If you suffer a loss, the lender can claim the asset you use as security for the margin loan.
Frequently asked questions
You can apply for an investment account if you’re over 18 and if you’re applying in your own name or in the name of a trust. Each type of investment account has its own application requirements. Before you can open an investment account, you may need to have an account with the financial institution, like a transaction account and a credit card or a home loan for example. Some investment accounts have a minimum opening balance, you need to provide your address, your tax file number (you can supply this information after you apply) and information about any accounts you hold with the financial institution.
You can jointly open some investment accounts but it depends on the provider and type of account.
By holding a diverse spread of investments, you’re reducing your risk. You can have multiple savings accounts, share trading accounts and term deposits from the same or different financial institution at a time.
How to invest $1,000
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Written by
Shirley Liu
Shirley Liu is Finder's global program manager. She was previously the publisher for banking and investments and has also written comparisons for energy, money transfers, Uber Eats and many other topics. Shirley has a Master of Commerce and a Bachelor of Media, Journalism and Communications from the University of New South Wales. She is passionate about helping people find the best deal for their needs. See full profile
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