Plain Vanilla Investments

No, it is not a code name for an illegal investment activity. Plain Vanilla is simply a very basic or standard version of a financial instrument.

Financial terms can be really hard to keep up with especially when you don’t have a background in finance and little or no experience in the industry. One of those terms you may or may not have seen around is “Plain Vanilla.”

No, it is not a code name for an illegal investment activity. Plain Vanilla is simply a very basic or standard version of a financial instrument.

It got its name from the usual vanilla ice cream we know and even vanilla cakes. The vanilla flavor is the default flavor and it is usually the most affordable one. However, there are now many other flavors that are more expensive with many more complex elements.

With investments, think of it this way: there are complex securities that investors invest in and then there are Plain Vanilla investments. Plain vanilla is the simplest form of a financial instrument with no complications or additions. They are usually bonds, options, futures, or swaps.

For example, a plain-vanilla (or simply vanilla) option gives the holder the right to purchase or sell the security at a predetermined price, within a specific timeframe, at a specific strike price, with a clear expiration date.

Whether they are call or put options, there are no special features. With the more exotic options, there are more levels of risk involved and they do require the investor to have more than a basic understanding of financial markets so as to use them optimally.

Example of complex options include digital options which have more complex digital payout systems.

One of the advices given to new investors is to stick to simple investments and avoid investing in complex securities. Unlike complex investment securities, plain vanilla investments help you avoid hidden risks and challenges that you might face.

Complex investment methods might seem to increase your chances of beating the market and making better profits, but they could have hidden fees or clauses.

The term isn’t just used in terms of investing. It can be used when you collect debt. A simple or plain vanilla debt arrangement is one that comes with a fixed borrowing rate and no other features. This means there are no convertible arrangements and the likes. Every aspect of it is clear.

A great use for plain-vanilla assets for investors is for hedging their exposure to a risky or volatile asset because there are no surprises. In order to remain within the plain vanilla space as an investor, you can invest in transparent and properly established companies, do not take on speculative investment strategies or securities, avoid stocks that have too much media attention, and understand every element of the investment process.

Do not fall for the exciting or enticing opportunities you hear about in the market. Your investment strategies and processes can be as simple as vanilla. Complicating it could do you more harm than good.

Written by Lawretta Egba.