Individual Securities
Individuals have access to a variety of investment vehicles that can be used to help them meet their short and long-term goals. The suitability of one investment over another depends largely on the individual’s financial situation and his or her own preferences, priorities and tolerance for risk. For those individuals, with excess funds, who have built a solid foundation of savings, protection and diversification of their investments, individual securities such as stocks and bonds, may present a suitable opportunity to achieve additional growth and income. As these investments entail substantial risk, investors need to develop a sound knowledge of their use as well as a clear understanding of their potential risks.
Common Stocks
Publicly owned companies, as the name implies, are owned by the public, consisting of individuals and institutions that purchase a fractional interest or share of the company. Their interest is represented by the shares of stock that are issued by the company. This is a way for companies to raise capital that can be used to fund its growth.
If the company is successful and grows, the stockholders share of the company can increase in value. If the company is not successful, the shareholder could lose value in his shares. There is also the possibility that shareholders can participate in the profits if the company’s Board of Directors declares a “dividend”.
Risk:
Stock values reflect the current valuation of a company as well as its near-term prospects for achieving earnings growth. While some companies may have good long term growth prospects, there are many factors that can cause the stock’s price to fluctuate in the short term. Investors who buy a stock when the market is moving up, may find themselves in a position to have to sell the stock when the market is moving down, which could result in a capital loss. Losses or gains are not realized until the stock is actually sold.
Reward:
Over time, stocks have the potential to generate returns that can outperform other investments. They are typically bought by investors who seek long term growth. Stocks that pay dividends can also be a source of current income for investors.
Corporate Bonds
In addition to raising capital by selling ownership shares, companies can also borrow money from the public by issuing debt securities. When an individual or institution buys a bond from a company, they become a bondholder and they receive interest from the company. At the time the bond matures, or comes due, the bondholder receives the principal back.
Bonds are issued at full face value with a specific interest rate affixed to it. A $1000 bond with a 5% yield will generate $50 of interest payments each year. Because bonds are sensitive to the movement of interest rates, their values will increase or decrease as rates move down or up. If an investor sells a bond on the open market, he could receive an amount that is greater or less than the original face value.
Potential Risks:
Like stocks, bonds can be traded on the open market. If a bond is sold before its maturity it market value may be less than its original face value. Bonds held to maturity will be redeemed for their principal amount , but there is a risk that the issuing company could encounter financial difficulties and default on the bond
Potential Rewards:
Bonds are typically purchased by investors who are seeking current income. Because bonds have the potential to increase in value, there is also the potential to achieve long term growth.
CEF
A closed end fund (CEF) is an investment structure (not an asset class), organized under the regulations of the Investment Company Act of 1940. A CEF is a type of investment company whose shares are traded on the open market, like a stock or an ETF. A common misunderstanding is that a CEF is a type of traditional mutual fund or an exchange-traded fund (ETF). A closed-end fund is not a traditional mutual fund that is closed to new investors.
Like a traditional mutual fund, a CEF invests in a portfolio of securities and is managed, typically, by an investment management firm. But unlike mutual funds, CEFs are closed in the sense that capital does not regularly flow into them when investors buy shares, and it does not flow out when investors sell shares. After the initial public offering (IPO), shares are not traded directly with the sponsoring fund family, as is the case with open-end mutual funds.
Instead, shares are traded on an exchange, typically, and other market participants act as the corresponding buyers or sellers. The fund itself does not issue or redeem shares daily. The risks of CEFs are; prone to volatility, less liquid than open-end funds, available only through brokers and may get heavily discounted due to market volatility. The positive takeaways are; helps with diversification, provides professional management, transparent pricing and potential for higher yields.
ETF
An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or alternative investments, but which can be bought or sold on any major stock exchange. An ETF can be structured to track anything from the price of an individual commodity to a basket of stocks and bonds. ETFs can even be structured to track specific investment strategies. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An exchange traded fund is a marketable security, meaning it has an associated price that allows it to be easily bought and sold .ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes .ETFs offer low expense ratios and some investment platforms offer commission free trades.
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