A variety of options exist for personal investment. While we won’t explore them in depth in this blog, I can consider a few common products and concepts.
Most typical investment products can be referred to as securities, with are essentially a legal representation of the right to receive future benefits under stated conditions.
Common types of securities include:
Treasury bills (or notes)
These securities involve lending money to the government for a relatively short period (typically three months to one year). The level of risk on these investments is typically considered to be low to none, and therefore the return on investment is relatively low.
Long term bonds
In the case of long term bonds, the investor is again lending money either to a government or company issuing the bond. The borrower commits to making cash payments each year (know as coupon payments), until a predetermined maturity dates. There payments include a repayment of a portion of the lender funds and an interest payment to compensate the lender.
Common shares represent partial ownership of a company and entitle the holder to dividend payments. Dividends are typically declared quarterly and paid to shareholders.
Other types of shares exist including preferred shares which have priority over common shares in terms of receiving payment in the event of bankruptcy or liquidation of a company.
What are dividends?
Dividends are distribution of portions of a company’s earnings that the company has decided to distribute to its shareholders. Dividends are usually granted in a dollar (or euro) per share and paid to shareholders who own the stock on a specified date.
An investment fund is a collection of investments pooled together and managed by professionals. The decisions to buy or sell those securities are made by the investment company behind the fund.
Funds become an interesting investment option for people who are not interested in stock or bond picking and trading.
There are two main type of investment funds:
1. Open-ended funds, which can be bought or sold from/to the issuer at any time during the fund lifetime. Most mutual funds are open-ended funds. Mutual funds are a popular investment tool for those interested in investing in a diversified portfolio, managed by a professional. Mutual fund companies are compensated by collecting management fees from investors.
2. Closed funds, which have a finite number of units issued at fund creation, and last for the whole fund lifetime.
Exchange Traded Funds, or “ETFs” are a relatively new and growing investment product.
They are a basket of stocks in many ways similar to a mutual fund, but they can be bought and sold like an individual stock on the market.
ETF’s have the advantage over mutual funds that they carry significantly Lowe management fees.
Capital markets are the markets that exist for trading financial assets. When common shares are issued to raise capital for a company, an underwriter is typically used to facilitate the introduction of shares to the market. This sale may be one or more investment banks who are confident they can profit from the share offering and buy the shares, then reissue them onto the secondary market, known as the stock exchange.