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Knowing High-Value Investments and Their Functions - Part 2

Investing Advice

Mar 01, 2023

Knowing High-Value Investments and Their Functions - Part 2

If you have been staying updated with the stock market, it would be a sin not to consider adding high-value investments to your portfolio soon. While it may entail significant risks, these assets can help you get a steady income stream, greater liquidity, and more diversification. 

They also help you get more significant returns. However, no blog series would be complete without providing daily uses of these lucrative assets. 

We previously discussed what high-yield investments and stocks are, their credit ratings, and their advantages and disadvantages. If you want to stay ahead in your financial journey, this article will enumerate five daily examples of high-value investments and their risks and rewards. 

1. CEFs

Closed-end funds (CEFs) are high-value investment funds that issue a fixed number of shares. You can purchase CEF shares by opening a brokerage account and consulting a fund manager. This professional manages the investments, mainly focusing on a particular sector. While the yields from the fund may be higher than other investments, you should also remember that there’s also a heightened risk. 

CEFs can increase their returns by borrowing money for investments. However, there could be financial difficulties if the fund has too much debt because CEFs usually don’t have readily available cash.

2. High-Yield Bonds

High-yield bonds are debt instruments companies issue with poor credit ratings. These firms may need more capital to expand their property or address financial issues. 

When investors purchase the bonds, they get periodic interest payments and can sell them any time before the maturity date or the peak of maturity value. You should also remember that the riskier the company, higher return potential but the greater the chance it won’t fulfill its obligations.

3. MLPs

Master limited partnerships (MLPs) let investors invest in different projects, particularly energy production-related ones. However, you should remember that MLPs can be subject to additional risks from changes in laws and regulations, and the complex taxation associated with these securities may need professional tax advice. 

Investors publicly trade MLPs, which are generally liquid but don’t pay corporate taxes as a pass-through entity. Instead, investors should pay taxes on distributions and any unrelated business taxable income earned by the MLP. 

4. P2P Loans 

In peer-to-peer (P2P) lending, investors directly loan to borrowers (individuals or businesses) and collect interest payments as they repay the loans. However, you should remember that the loans are usually unsecured, i.e.,they don’t have assets to back them. 

Companies base the investor’s risk on the borrower’s credit profile. The investor must determine which loans to invest in and manage the potential risks associated with them. While the returns may be higher than other investments, you must also remember the risk that borrowers may default, which means the investor can lose all their money. Moreover, many P2P investments are usually illiquid, where investors may need to sell their notes at a discount to access their money. 

5. REITs

Real estate investment trusts (REITs) are high-value investments that allow investors to invest in real estate without owning physical properties. You can choose between equity or mortgage REITs, where both options payout dividends to shareholders. 
Equity REITs usually generate rent income, while mortgage REITs earn interest on real estate loans. However, you must know that mortgage REITs are riskier because of their higher borrowing and potential exposure to mortgage-backed securities, which can be volatile during an economic downturn. 

Important Note to Remember

The average investor should think twice before purchasing high-value investments because of the severe risks involved. While diversification may be essential, you should not have high-yield investments to create a balanced portfolio.

The Bottom Line

There are different examples of high-value investments in the stock market. However, like other things, you should also prepare yourself for possible losses in the worst-case scenarios. 

Investment.com offers classes about high-value investments to help investors understand and access a range of asset investments. Download our app now and gain better control over your financial future!