Types of Securities
When you buy common shares or stocks, you purchase partial ownership of a company. As a result, you are entitled to specific rights as a part owner, such as voting rights. Your voting rights are directly linked to the amount of the company you own.
Voting rights allow shareholders/stockholders to vote on several important matters, such as the corporate directors who will lead the company. As owners of the business, however, shareholders are the last to get back any of their investment if the business fails.
Sometimes, especially when businesses are profitable, companies will make a decision to reward their shareholders with a payment out of the company’s profits or retained earnings. This is known as a dividend. If the company declares that it will give a dividend to its common shareholders, the shareholders will receive the dividend declared for each share he or she owns.
While dividends may be an important factor in considering whether or not to invest in a particular common stock/common share, this type of security is not typically used for generating a consistent stream of income. Generally, people invest in common stocks or common shares because they expect that the business they become part-owners of will grow in value over time. If it does, then the value of their ‘share’ of the company will also increase.
Preference Shares/Preference Stock
Preference shares or stocks are a type of security that pays a dividend, so long as the company makes enough profit to pay the dividend. The dividend may be fixed, meaning that it does not change, or variable, meaning that it may increase and decrease over time.
Owners of preference shares (sometimes called preferred stock or preferred shares) receive dividends before common shareholders. They also have a higher priority than common shareholders do to get back some or all of their investment should the company issuing the shares fail. However, preference shareholders do not usually have voting rights.
Because preference shares/stocks offer a constant flow of dividend payments, people often invest in them to receive a regular stream of income.
A bond is a security which represents a loan from the investor to the company or government issuing it. Bonds have a fixed life, representing the length of time the money was lent to the company or government for. The bond will earn a rate of interest, known as a coupon, over its life. At the end of the bond’s life (at its “maturity”) the owner of the bond receives the ‘face value’ of the bond, which is the initial amount that was borrowed, plus the final coupon payment. A simple illustration follows:
|Date||Activity||Investment Jane makes||Reward/Expectation|
|1 Jan. 2011||Jane Buys XYZ 5% bond, maturing 31 Dec. 2014||$1,000|
|31 Dec. 2011||XYX pays a coupon (5 percent of $1,000)||$50|
|31 Dec. 2012||XYX pays a coupon (5 percent of $1,000)||$50|
|31 Dec. 2013||XYX pays a coupon (5 percent of $1,000)||$50|
|31 Dec. 2014||XYX pays a coupon (5 percent of $1,000)||$50|
|31 Dec. 2015||XYX makes final coupon payment and repays the bond’s face value at maturity||$1,000 + $50|
Sometimes the coupon will be fixed, meaning that the rate of interest it earns will not change over the life of the bond. Other bonds may carry a variable coupon which may change over the life of the bond. There are other features which may vary as well.
As an investment, bonds are often selected for a constant stream of income. They do not generally increase in value as the company or government that issued them grows, so investors in bonds are not usually looking to make the kind of profits selling them later as investors in common stock are looking to make.
An investor should understand all the aspects of how the bond he or she is considering will work, in addition to understanding how the company intends to generate the money to make all of the coupon payments and pay the face value of the bond on maturity.
Bonds are securities, so they may be bought and sold throughout their life. When bonds are bought and sold in-between coupon payment dates, the amount of coupon the bond would have already earned is factored into the price the buyer pays.
Bahamas Government Registered Stock (BGRS)
Although this security has the word “stock” in its name, it has the characteristics of a bond. BGRS is issued by the Government of The Bahamas.
Bahamas Government Registered Stock (BGRS) can have a maturity date of up to 30 years.
They have a minimum investment of $100, and carry interest rates which, if not fixed, are usually tied to the Bahamian Prime Rate. The investor then receives interest income, which is normally paid semi-annually, and the principal investment at maturity.
This type of security (BGRS) is not regulated by the Securities Commission of The Bahamas. The Central Bank of The Bahamas functions as the official registrar for securities of the Government. You can get more information about BGRS from the Banking Department of the Central Bank of The Bahamas.
Characteristics of stocks and bonds
|Type of Security:||Common Shares||Preferred Shares||Bond|
|Represents:||Equity (ownership)||Equity (ownership)||Debt (loan)|
|Payments:||Dividends may be paid||Dividend payments so long as company makes enough profits||Coupons (regular interest payments)|
|Maturity date (Set life/duration):||No||No||Yes|
|Priority in case of business failure:||Last||Before common stock holders||Before preferred & common stockholders|
Investment funds combine money from a number of investors. They invest this money to make a profit. Investment funds are sometimes referred to as mutual funds or collective investment schemes.
When someone invests in an investment fund, he or she is buying into the many assets that the fund is invested in. In fact, one of the goals of investment funds is to ensure that investors get the benefit of a number of different investments to spread the risk and the reward.
Investments funds are usually professionally managed. A fund manager is responsible for researching and selecting the fund’s holdings and monitoring the activities and trends of all the businesses and assets the fund is invested in (its ‘portfolio’).
Often, investment funds are priced so their units are affordable for investors who do not have a lot of money to invest.
There are certain things an investor will want to look out for when considering investing in an investment fund. This includes ensuring that the fund is registered by the proper regulatory authority.
You should also be sure you understand the fund’s investment strategy—how it intends to invest the money it accumulates from investors to generate profits. You should understand all of the costs involved with investing in the fund, such as annual fees, sales fees, management fees and redemption fees. These will vary from fund to fund and can significantly impact the returns you can make as an investor. This information should be contained within the investment fund’s prospectus, so be sure to read it prior to investing.
With an understanding of the fund’s investment strategy and the associated risk, you can decide if the investment is a good fit for you.