What can you invest in?

What laws govern investing?

Investing in the Czech Republic is governed by several key laws:

1. The Act on Capital Market Business defines investment instruments, the rules of business on the capital market and sets out the requirements for securities dealers.
2. The Act on Investment Companies and Investment Funds regulates the activities of investment companies and funds.
3. The Law on Bonds concerns bonds and lays down the rules for their issuance.
4. The Law on Certain Measures against the Legalization of Proceeds of Crime and Financing of Terrorism regulates measures against money laundering and financing of terrorism (AML), which is why you must identify yourself when investing.
5. The Income Tax Act provides for taxation of investment income, both dividends and capital gains.

What is an investment?

According to the Capital Market Business Act, an investment is any form of investment of funds in equity or debt instruments where the investor expects a return, i.e. a return on investment. In other words – the money works for you and you hope to get back an appreciated return. But there is no guarantee of this.

An investment can be buying stocks, bonds, mutual funds, real estate, as well as commodities such as gold or modern cryptocurrencies. From a legal point of view, you will most often come across the term “investment instruments”, which are defined in the aforementioned law.

What are the basic types of investing

1. Investing in shares

A share investment is the purchase of a share in a company. This gives you not only the potential to grow the value of the share, but also the right to receive dividends. At the same time, however, you bear the risk that the value of the share will fall. In the Czech Republic, trading in shares is regulated by the Czech National Bank (CNB), which issues licences to securities dealers.

2. Bonds

Bonds are a typical example of afixed-income investment. The bond issuer is essentially borrowing money from you and committing to pay you back with interest. Again, this is a regulated investment instrument. It is advisable to check the issuer – the entity issuing the investment instrument – before you buy. For example, it may be a company that issues bonds or an investment fund that offers units. In recent years, there have also been cases in the Czech Republic where retail investors have lost everything because the issuer went bankrupt, failed to meet the terms of the issue, or even turned out to be a fraud.

3. Mutual funds and ETFs

Mutual funds or ETFs (exchange-traded funds) tend to be suitable for first-time investors. A mutual fund is managed by an investment company that pools funds from retail investors and invests them according to a predefined strategy. These companies are subject to strict regulation under the Investment Companies and Investment Funds Act. The advantage is diversification and professional management.

These are the basic types of investments, however, the investment world is much broader and includes other options that are worth knowing. These include investments in real estate, which are popular for their stability and the possibility of regular rental income.

It also includes commodities such as gold, silver and oil, which often serve as a hedge against inflation and market uncertainty.

Modern investors are also increasingly looking to cryptocurrencies, which offer high profit potential but also significant volatility and risk.

Other forms of investing include investments in art, collectibles or start-ups, which can provide interesting returns but require in-depth knowledge and experience.

These types of investments are less standardised and often less regulated, so they require extra caution and a thorough examination of all risks.

Some people prefer short-term investments

If you don’t want to tie up your money for many years, then you’ll probably be interested in how short-term investments work. Examples include money market funds, treasury bills, short-term bonds or higher-interest time deposits.

The aim of these instruments is to get short-term value for money, usually within a few months to two years. The return on investment here is usually lower, but the risk is considerably lower than for long-term investments.

How does the investment calculator work?

An investment calculator is a tool that helps you calculate the return on your investment depending on your initial deposit, expected return and the length of time you invest. For example, with a regular monthly investment of CZK 1,000, and an average annual return of 6%, you will invest CZK 120,000 over 10 years, but you could have more than CZK 163,000.

Such calculators are freely available online. But take their outputs with a pinch of salt – they don’t take into account taxes, fees and the risk of market fluctuations.

What about taxes?

Investment income is subject to taxation. For individuals, this is generally a 15% income tax. If you hold a security for more than 3 years (the so-called time test), the proceeds from its sale are tax-free.

Dividends, on the other hand, are taxed directly by the company at a withholding tax (normally 15%) and you only receive the net proceeds. For funds or ETFs, it depends on their jurisdiction – some have special tax regimes.

The risks of investing are not negligible

Investing always carries some risks. Although legislation, in particular the Capital Market Undertakings Act and the Investment Companies and Funds Act, provides investors with a certain degree of protection (for example, through the obligation to provide full and clear information or through strict transparency rules for funds), no legal framework can guarantee that your investment will actually yield a profit. Indeed, the return on an investment depends on a number of factors, many of which are beyond the control of the investor and the provider of the investment vehicle.

Anyone who decides to invest should therefore first have a good understanding of their risk profile – the extent to which they are willing to accept the possibility of loss.

Next, it is very important to diversify, i.e. spread investments across different asset types, markets or currencies to reduce the overall risk of the portfolio.

In particular, the most common risks of investing include market risk, where the value of your investment can easily fall due to market fluctuations.

You should also take into account what is known as credit risk, which is a situation where the issuer of a bond or other security fails to meet its obligations – for example, stops paying income or principal.

Currency risk comes into play with foreign currency investments, where fluctuations in the exchange rate can significantly affect the real value of your investment in CZK.

Finally, there’s liquidity risk: some investment instruments, especially lesser-known or specific ones, can be very difficult to sell when you need your funds back quickly. These are all factors that every investor should consider carefully before putting their money into any investment.

Practical advice for beginner investors

• Don’t invest in anything you don’t understand.
• Check every intermediary, especially whether they are licensed by the CNB.
• Don’t be pressured to make a quick decision, think carefully.
• Keep an eye on the fees – you may end up losing your return due to high costs.
• Use a trusted investment calculator for a basic overview.

Investing has a future, but it also has rules. Investing is no longer the preserve of the rich – good investing can be accessible to everyone. Just start with common sense, patience and basic legal awareness. Whether you choose to invest in stocks, funds, or short-term investments with the goal of short-term cash appreciation, always think of the return on investment in the context of the potential risk.

The legal framework in the Czech Republic is set up to protect investors, but the final decision is always yours. Therefore, we recommend: invest only after you know not only the return, but also all the legal and tax rules.

Summary

Investing can be an effective tool for getting value for money, whether in the short or long term. However, it is important to understand not only the basic investment tools, but also the legal, tax and risk considerations involved before embarking on it. The Czech legal framework provides some protection for investors, but profits are never guaranteed. Each investment therefore requires careful consideration, verification of the issuer, understanding of fees and realistic expectations of return. Whether you are considering investing in shares, funds, bonds or other assets, invest with common sense, discretion and information.