Know your options – 4 types of investments and what they mean

SSL in the Money

With Chavelle Kassie

Tuesday, June 14, 2016

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By now you should have heard enough about investing to be interested in giving it a shot. There are various types of investments to choose from, but I’m going to focus on four that are predominant within our current population of investors. For those who aren’t exactly keen on trying to decipher the lingo of the financial sector, I’ll do my best to break down the following types of investments:


1. Common Stock


2. Preferred Stock (Preference Share)


3. Mutual Funds


4. Corporate Bonds




COMMON STOCK


A common stock also referred to as a share, security or equity, is having ownership of a part of a company and a portion of the profits. These bits of profits are paid out by some companies either quarterly or semi-annually.


A shareholder is also entitled to the voting rights attached to the stock. Examples of common stocks on the local market include Caribbean Cream Ltd (KREMI) and Lasco Manufacturing Services Ltd, whereas on the international stock market you can buy equities such as Apple Inc. and Wells Fargo & Co.


There are many companies offering equities both on the local and the international stock markets for individuals to buy. The main method of purchasing stocks is through a brokerage company. The risks of an investor are lowered if stocks are bought from a profitable company with a good foundation.



Pros:


o Common stocks are very easy to buy and sell.


o They are known to outperform bonds and preferred shares.


o Many stocks provide the possibility for an increase in capital and income. They can also offer safety from moderate inflation



Cons:


o There is no guarantee on your original investment. Stocks fluctuate in value and there is always the possibility of losing your principal.





PREFERENCE SHARE


A preference share is also commonly known as preferred stock. These are company shares with a fixed dividend that is paid out to preferred shareholders before common stockholders. Preferred shares can be seen as a cross between equities and bonds.


If the company goes bankrupt, shareholders with preferred stocks have the right to be paid first from the company assets. Preferred shares dividends also tend to yield more than those offered by common stocks and can also be paid out monthly or quarterly. A preferred shareholder is also entitled to be paid dividends in arrears if a company is struggling before payments can be resumed for common shareholders.


The different kinds of preferred shares include:


1. Cumulative preferred stock – these are based on the stipulation that any dividends that have been omitted in the past should be paid out to preferred shareholders first, before common stockholders can receive dividends.


2. Non-cumulative preferred stock refers to the type of preference share that does not pay unpaid or omitted dividends.


3. Participating preferred stock – this allows holders to receive additional dividends given the payment to common shareholders exceeds that of the normal dividend issued to preferred stockholders.


4. Convertible preferred stock – this allows preferred shareholders to convert their preferred shares into a set number of common shares. This is usually based on how the common stock is performing.




MUTUAL FUNDS


A mutual fund is comprised of a large group of investors who pool their investment capital together and present it to a company to invest it on their behalf. This sum of money is then used to buy a variety of stocks. Mutual funds should usually be desired as a long-term investment. Mutual funds are usually useful for providing capital appreciation, income and tax-deferred savings.



Pros:


o Instant diversification, which is always recommended for any investment portfolio.



Cons:


o You pay management fees regardless of income from the mutual fund.




CORPORATE BOND


Buying a corporate bond indicates lending your money to a corporation for a preset time period, which is known as the maturity. A premium must also be paid by the company for borrowing your money. This is usually a predetermined interest rate and is known as a coupon.


The interest payments are usually made out semi-annually until the maturity date is reached. Therefore, when the bond has reached its maturity date the investor would have received his/her initial capital plus the interest paid by the company.


Before spending money on a corporate bond, there are at least three important issues to consider.


1. Who is issuing the bond?


2. What is the interest (or coupon) being offered?


3. When will the money be repaid (maturity date)?





Pros:


o Offer a slightly higher revenue than government bonds.


o Excellent source of income, especially for retirees.


o Highly useful for tax-deferred retirement savings accounts.





Cons:


o May sometimes have a higher degree of risk than government bonds.


o Fixed interest payments and the income are taxed at the same rate.


o There is little protection offered by corporate bonds against inflation because the interest payments are normally a fixed amount until maturity.




Now that you have an understanding of the specifics on the possible investment options, you can confidently inform your local brokerage company on how they can help you with your investment needs.





Chavelle Kassie is a processing associate? at Stocks and Securities Ltd.

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