Alternative Investments

Question 1

Common characteristics of investing in a work of art or other collectables

Answer 1

Doesn’t usually generate an income

Often costs money to keep

Value dependent on limited supply and fluctuating demand

Authenticity is very important

Question 2

Potential drawbacks for investing in art or collectables

Answer 2

Need to ensure authenticity

Tastes change

Difficult to diversify

Question 3

What are commodities? Give examples

Answer 3

Hard commodities - products of mining and other extractive processes e.g. gold and natural gas

Soft commodities - typically grown e.g. coffee and sugar

Question 4

How to invest in commodities

Answer 4

Commodity-related futures and options either on an exchange or directly between producers and manufacturers. Taking positions in commodity futures very risky - prices volatile

Exchange-traded commodities are pooled investments listed on LSE that track performance of an underlying commodity / commodity index

Could invest indirectly via funds or by buying shares in commodity companies

Seen as a hedge against inflation

Question 5

Risks of investing in commodities

Answer 5

Volatility / frequent imbalance between supply and demand

Market is dominated by big companies and traders

Demand affected by business cycle

BUT can offer good diversification as commodity prices do not tend to move in same direction as other asset classes

Question 6

Cryptocurrencies - characteristics

Answer 6

A digital currency system produced by a computer e.g. Bitcoin

Payment processing technology is known as a blockchain

Each blockchain is unique to each user

Mining is computer accounting and confirms the transaction is legitimate

Transactions are anonymous and not backed by government/central banks

Not regulated by FCA

A cryptocurrency wallet is a digital wallet