Saving means setting money aside to prepare for unexpected expenses or future purchases. Risk and return always go hand in hand. Deposits are the most reliable and secure form of saving.
Investing means putting money to assets (such as shares, bonds or funds) with the expectation that they will increase in value and/or generate regular returns. Investments are typically divided into fixed-income and equity investments. The choice depends on the desired level of risk and investment horizon. Diversification can help reduce risk.
Bonds are debt instruments whose return consists of interest and any capital gains or losses upon sale. Some bonds, such as index-linked bonds, have returns tied to the performance of an underlying asset.
In fund investing, investors’ money is pooled into an investment fund managed by a fund management company. Different funds allocate their investments in different ways – for example, following a specific index, targeting a geographical region or focusing on a sector.
Stock constitutes a company’s share capital, which is part of their equity. Shares are individual units in a stock. The shares of listed companies are freely traded on the stock market. The returns on equity investments come from dividends and capital appreciation. Other securities include ETFs, ETCs and various derivatives. Properties and forests are also common investment targets.
In insurance saving, the customer pays either a lump sum or recurring premiums into an insurance contract. At the agreed time, the policyholder or beneficiary receives the accumulated savings consisting of the paid-in premiums and the returns generated on them.
Key terms
Diversification: Diversification means spreading investments across different geographical regions, instruments, sectors or over time to reduce risk.
Underlying asset: An underlying asset is the security, index, share, fund, interest rate or other instrument on which the value of a financial instrument is based.
Asset class: An asset class is a category of investments, such as shares, commodities, fixed income or real estate.
Combination products: Investment products created by banks that combine, for example, a fixed-term deposit with an index-linked bond or a fund investment.
Structured investment product: A structured investment product is usually a security or deposit consisting of two parts: a fixed-income component and a return component.
TyEL: TyEL stands for the Finnish Employees Pensions Act (Työntekijän eläkelaki), and refers to the statutory earnings-related pension insurance for private sector employees in Finland.
MiFID II and MiFIR: EU legislation governing markets in financial instruments and defining, among other things, the obligations of investment service providers to know their customers.
Liquidity: The liquidity of accounts and other asset types refers to how easily they can be converted into cash.
Bond: A fixed-term loan issued by a company, government, municipality, credit institution or organisation to borrow money from investors. A bond with collateral is called a secured bond.
Coupon rate: The interest paid on a bond.
Nominal vs. effective interest rate: The effective rate shows the actual yield by relating the nominal coupon payments to the purchase price (issue price) of the bond.
Index-linked bond: A bond whose return is linked to the performance of an underlying asset.
Capital redemption policy: An insurance product where the return is either fixed or linked to investments like in other insurance saving. Unlike other insurance saving products, it has no insured person..
Dividend: The portion of profit distributed by a company to its shareholders.
Growth vs. value stock: Growth stocks are characterised by rapid revenue growth and often by strong price volatility. Growth companies typically reinvest their profits, which means that dividend payouts are usually rare and lower than average. Value stocks show steadier price development and typically pay consistent dividends.
ETF (Exchange Traded Fund): A stock exchange-listed index fund, usually tracking an index. ETFs can also be inverse (tracking the opposite of an index) or leveraged (magnifying index movements).
ETC (Exchange Traded Commodity): Exchange-traded securities similar to ETFs but tracking the price development of a commodity, such as oil, gold, coffee or metals.
Derivatives: Financial instruments whose economic value is based on another security, index, currency, commodity or right.
Forwards, futures and options: Types of derivatives. In a forward or futures contract, both parties commit to carrying out the transaction. In an option, only the seller is obliged; the holder may choose whether to exercise it.
Warrant: A type of option issued by a bank or broker, with a fixed term. Turbo warrants may expire early if the underlying asset reaches a knock-out level, offering both higher potential returns and risks.