Knowledge Base — Chapter 1

Investment Categories

What are the different types of investments, and what are their characteristics, advantages and risks?

1.1 Stocks

A stock is proof of ownership of a small piece of a company. As a shareholder you are a co-owner and entitled to a share of the profits (dividend) and capital gains.

Characteristics

  • Traded on a stock exchange (e.g. AEX, NYSE)
  • Value fluctuates daily
  • Voting rights at shareholder meetings (ordinary shares)
  • No fixed term

Advantages

  • High potential return (capital gains and dividends)
  • Liquid: easy to buy and sell quickly
  • Protection against inflation in the long run
  • Diversification across sectors and countries is possible

Disadvantages

  • High risk: you can lose (a large part of) your investment
  • Prices can fluctuate sharply (volatility)
  • In bankruptcy shareholders are last to recover anything
  • Requires knowledge and attention

1.2 Bonds

A bond is a loan you grant to a company or government. In return you receive periodic interest (coupon) and get your principal back at the end.

Characteristics

  • Fixed term (e.g. 5, 10 or 30 years)
  • Fixed or variable interest (coupon)
  • Issuers are governments (government bonds) or companies (corporate bonds)
  • Creditworthiness rated by agencies (AAA to D)

Advantages

  • More stable income stream than stocks (fixed coupon payments)
  • Lower risk than stocks, especially government bonds from stable countries
  • In bankruptcy, bondholders rank above shareholders
  • Good diversification within a portfolio

Disadvantages

  • Lower long-term return than stocks
  • Interest rate risk: rising market rates reduce the price of existing bonds
  • Inflation risk: fixed rate loses purchasing power during high inflation
  • Credit risk with low-rated corporate bonds (high yield / junk bonds)

1.3 Investment Funds (e.g. ETFs)

An investment fund pools the money of many investors and invests it collectively in a diversified portfolio. There are actively managed funds and passive index funds (ETFs).

Characteristics

  • Managed by a professional asset manager (active) or linked to an index such as the AEX (passive/ETF)
  • Provides instant diversification across dozens or hundreds of investments
  • Costs expressed as TER (Total Expense Ratio)

Advantages

  • Instant diversification with relatively little capital
  • No in-depth knowledge required (especially for index funds)
  • Professional management (active funds)
  • ETFs are cheap and transparent

Disadvantages

  • Costs reduce return (active funds: 1–2% p.a., ETFs: 0.05–0.5%)
  • Active funds often don't outperform the market (index)
  • Less control: you don't choose the individual investments
  • Some funds are less liquid or have lock-up periods

1.4 Term Deposits

A term deposit is a sum of money placed with a bank for a fixed period at an agreed interest rate. You cannot access it during the term.

Characteristics

  • Fixed term: from a few months to several years
  • Fixed, pre-agreed interest rate
  • Covered by the European Deposit Guarantee Scheme (DGS): up to €100,000 per bank per person

Advantages

  • Maximum safety (guarantee up to €100,000)
  • Fully predictable return
  • No knowledge of financial markets needed
  • Ideal as a "quiet" part of a portfolio or emergency buffer

Disadvantages

  • Low return that doesn't always keep pace with inflation
  • Limited liquidity: early withdrawal often incurs penalties
  • No chance of extra return or capital gains
  • With higher inflation you lose real purchasing power

1.5 Savings

Savings are money held in a savings account at a bank. It is the most accessible and trusted way to set money aside, with full flexibility.

Characteristics

  • Variable interest rate, adjusted periodically by the bank
  • Money is (almost) fully withdrawable at any time
  • Covered by the Deposit Guarantee Scheme (DGS): up to €100,000 per bank per person
  • No fixed term or mandatory deposit

Advantages

  • Maximum safety and peace of mind: no price risk
  • High liquidity: money always available for unexpected expenses
  • Simple and accessible for everyone
  • No knowledge or experience required
  • Ideal as an emergency buffer (recommended: 3–6 months of fixed costs)

Disadvantages

  • Low interest rate, often below inflation, reducing your purchasing power
  • Rate can be lowered at any time by the bank
  • Not suitable as a long-term wealth building instrument
  • For amounts above €100,000 no guarantee applies

1.6 Cryptocurrencies

Cryptocurrencies are digital, decentralised currencies that use blockchain technology. Well-known examples are Bitcoin (BTC), Ethereum (ETH) and thousands of other "altcoins".

Characteristics

  • Fully digital, no central bank or government behind them
  • Price determined by supply and demand on crypto exchanges (e.g. Coinbase, Binance)
  • Transactions recorded on a blockchain: transparent and immutable
  • Largely unregulated, although Europe introduced MiCA regulation in 2024
  • Extremely volatile: price swings of 20–50% in a short time are not unusual

Advantages

  • Very high potential return (Bitcoin rose from cents to tens of thousands of euros)
  • Accessible: anyone with internet can participate, tradeable 24/7
  • No intermediary needed (banks, brokers)
  • Diversification outside the traditional financial system
  • Limited total supply (e.g. Bitcoin max. 21 million) may protect against inflation

Disadvantages

  • Extremely high risk: price can drop 50–90% in a short time
  • No legal guarantee or deposit protection
  • Vulnerable to hacks, fraud and loss of access codes (private keys)
  • No intrinsic value or underlying cash flows like dividends or interest
  • Regulatory risk: banned or restricted in some countries
  • Large ecological footprint (especially Bitcoin due to energy consumption)

1.7 Real Estate

Real estate as an investment means buying property — a home, apartment or commercial property — with the aim of rental income and/or value appreciation. Indirect investing is possible via property funds or REITs.

Characteristics

  • Tangible, physical investment with intrinsic use value
  • Return consists of two components: rental income + value appreciation
  • Typically requires significant starting capital (own home or rental property)
  • Indirect real estate (REITs, property ETFs) is also possible with limited capital
  • Subject to local market conditions and regulations (e.g. tenancy law)

Advantages

  • Stable, recurring income via rental payments
  • Historically good protection against inflation (rents rise in line with inflation)
  • Financing with a mortgage possible: leverage increases return on equity
  • Tangible and understandable as an investment form
  • Less daily price volatility than stocks or crypto

Disadvantages

  • High entry barrier: large starting capital or mortgage required
  • Low liquidity: selling takes weeks to months
  • Management and maintenance cost time, money and energy (vacancies, tenants, repairs)
  • Concentration risk: one property in one region is poorly diversified
  • Risk of value decline with rising interest rates or regional economic downturn
  • Increasing regulation in the Netherlands (points system, transfer tax, box 3 levy)