When you decide to invest your hard-earned money, it goes through the financial landscape like a tiny explorer navigating a vast and complex world. For you, it is like planting a seed in the hope of receiving a bountiful harvest.
But have you ever wondered where your money actually goes when you make an investment? If you have, you’re in luck! Read on to find out.
One common destination for your investment is the stock market. When you buy stocks, you’re essentially purchasing ownership (shares) in a company. Your money becomes a valuable asset on the company’s balance sheet, and you become a shareholder, entitled to a portion of the company’s profits, known as dividends. Your investment supports the company’s operations, growth initiatives, and innovation. So, when you invest in stocks, your money goes into the engine that drives businesses forward. It’s like having a stake in the success of companies and sharing in their prosperity.
Stock prices fluctuate based on market demand, company performance, and other economic factors.
Bonds are essentially ‘debt securities’, where investors lend money to governments, corporations, or other entities in exchange for periodic interest payments, known as coupon payments, and the return of the bond’s face value, known as the principal or par value, upon maturity (at the end of the agreed term).
Bonds come in various types, including government bonds (issued by governments), corporate bonds (issued by corporations), municipal bonds (issued by local governments), and more specialised bonds like mortgage-backed securities (backed by pools of mortgages) and convertible bonds (which can be converted into common stock).
In essence, when you invest in a bond, you lend your money to someone else in exchange for regular interest payments as well as the bond’s original value at maturity.
Typically, the most common investment to make if you are going at it alone is into an ETF (Exchange-Traded Funds).
When you invest in Exchange-Traded Funds (ETFs), your money typically goes through a series of steps within the financial system. Here’s a simplified breakdown of where your money goes:
Investor Contribution: When you decide to invest in an ETF, you purchase shares of the fund through a brokerage account. Your money, along with that of other investors, is pooled together.
Creation of ETF Shares: To create new ETF shares, a specialised entity called an “Authorised Participant” (AP), often a large financial institution or market maker, assembles a basket of the underlying assets. These assets can include stocks, bonds, commodities, or other securities that the ETF aims to track. The AP delivers this basket of assets to the ETF issuer in exchange for ETF shares.
Trading on Stock Exchanges: Once the ETF shares are created, they can be bought and sold on stock exchanges, much like individual stocks. Investors can purchase these shares from other investors who are looking to sell or directly from the ETF issuer in some cases.
Index Tracking: ETFs are designed to track specific market indices or benchmarks. The ETF issuer manages the portfolio to mimic the performance of the underlying index. This passive management strategy helps keep costs low.
Dividends and Interest: As the ETF holds the underlying assets, it receives dividends, interest payments, or other income generated by those assets. These payments are typically distributed to ETF shareholders.
Redemption of ETF Shares: When an investor decides to sell their ETF shares, the process works in reverse. The shares are sold on the exchange, and the investor receives the current market price for their shares. The AP can then redeem these shares with the ETF issuer in exchange for the underlying assets or cash.
To summarise, your money is invested in the underlying assets held by the ETF, and the ETF shares represent your ownership in those assets until such time as you choose to sell the fund.
Getting your money back from investments involves several steps, and the process can vary depending on the type of investment you’ve made. Here’s a general overview of how you can receive your invested funds:
Stocks and ETFs: When you invest in stocks or Exchange-Traded Funds (ETFs), you have the flexibility to sell your holdings at any time during the trading hours of the stock exchange where they are listed. To get your money back, you need to place a sell order through your brokerage account. Once the order is executed, you’ll receive the proceeds in your brokerage account. You can then transfer the funds from your brokerage account to your bank account. Keep in mind that stock prices fluctuate throughout the trading day, so the amount you receive may vary depending on the prevailing market price when your order is filled.
Bonds: Bond investments typically involve receiving periodic interest payments and, upon maturity, the return of the bond’s face value. If you hold an individual bond until its maturity date, you’ll receive the face value of the bond, which is the initial principal amount you invested. However, if you wish to sell a bond before its maturity, you can do so through the secondary bond market. Bond prices in the secondary market may differ from their face value due to changes in interest rates and credit risk. Selling a bond before maturity may result in a capital gain or loss.
Mutual Funds: When you invest in mutual funds, you can redeem your shares directly with the fund company at the current net asset value (NAV) price, which is calculated at the end of each trading day. To redeem your mutual fund shares, you typically submit a redemption request to the fund company through your brokerage or directly if you have an account with the fund company. The fund company will then send you the redemption proceeds, usually via check or electronic transfer, which you can deposit into your bank account.
It’s important to note that the time it takes to receive your investment proceeds can vary. Stock and ETF sales are generally settled within a few business days, whilst bond transactions and mutual fund redemptions may take a bit longer. Additionally, some investments, such as real estate and certain alternative investments, may have longer exit timelines and specific processes for cashing out.
Understanding where your money goes when you invest, how to make informed investment choices, and how to retrieve your funds when needed are crucial aspects of your overall financial planning and investment strategy.
Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice.