Equities, also known as "stocks", are shares of ownership in a company; therefore, when you buy stocks, you are purchasing an ownership interest in that company. A company's stockholders or shareholders all have equity in the company, or own a fractional portion of the whole company, expecting to profit when the company profits. Companies issue two basic types of stock: common and preferred shares.
Common shareholders initially provide the equity capital to start the business. Being the type of stock in which most people invest, this shares can easily be bought or sold, and entitles the holder to voting rights (usually one vote per share), capital appreciation and dividends (payable at the discretion of the directors of the company). The drawback to owning common shares is that, as senior creditors, bondholders and preferred shareholders all have prior claims on the earnings and assets of a company.
Unlike common stock, preferred shares generally entitles stockholders to fixed dividends, and to a stated dollar value per share in the event of liquidation. Having priority over common shares, preferred stockholders have a greater claim to a company’s assets and earnings; besides being paid ahead of common shareholders, this implies that the preferred stockholder is better protected if company´s earnings are diminished. One shortcoming of preferred shares is that, typically, these shares do not provide voting rights.
Considering a long time horizon, equities have historically provided superior returns compared to fixed-income investments, and even though stocks might fluctuate more in value, these fluctuations tend to smooth out over time. If a particular equity is down, the key is to determine when it is a temporary setback and when it is a more serious problem.
Certain equities like income trusts can enhance your income. In addition, the income generated by equity investments is often taxed more favourably than interest income.
One of the main reasons to invest in equities is its effectiveness when protecting your wealth against the erosion produced by inflation. Due to its higher returns, in the long term equities provide, compared to fixed-income or cash investments, more protection against the loss of value caused by inflation.
The risks involved with equity investments are mainly associated with the volatility of the stock market.
A fixed-income security is a debt instrument representing a loan by the investor to the issuer, which can be a government, corporation or other entity aiming to finance or expand their operations.
Additionally to the return of the capital borrowed (“principal” or “face value”) at maturity, the purchase of a bond, treasury bill, preferred share or any other fixed-income product provides investors a return in the form of fixed periodic payments, turning the investment into a low-risk way to generate an extra source of income. When compared to variable-income instruments such as stocks, fixed-income securities usually have lower return rates, but, unlike equities, they provide a guaranteed return on the initial investment (if held to maturity).
Bonds: Usually issued by governments or corporations, a bond is an obligation to the investor contracted by the issuer, which promises to repay the principal on a fixed maturity date, plus a series of regularly scheduled interest payments.
US Treasury bills (T-bills) Issued with a maturity date of 12 months or less, T-bills are the safest type of short-term debtinstrument issued by a federal government. The face value of a treasury bill is paid at the maturity, as it does not make periodic interest payments.
Strip coupons and residuals Strip coupons and residuals are instruments purchased at a discount from their face value, whichmature at par (100). Unlike regular bonds, strip coupons make no periodic interest payments, butthey generally offer higher yields, and can also fluctuate more than the price of a bond of similarterms and credit quality.
Preferred shares
Mutual funds are investment strategies that pool together money from different investors, allowing you tobuy a vast collection of stocks, bonds and other securities (portfolio) that are overseen by experiencedfund managers.
The price of the fund is known as its net asset value (NAV); it usually varies from day to day depending on the value of the investments in the fund, and is determined by the total value of the securities in the portfolio, divided by the number of the fund's shares.
Investing in mutual funds allows you to diversify your securities, resulting in a well-balanced portfolio that can help to decrease the overall exposure to market fluctuations. Achieving such diversity on your own is bound to be more expensive and sometimes highly impractical. Furthermore, as experienced professionals manage mutual funds, lacking the time or expertise to manage your investments is no longer a problem.
Mutual funds can be open-end or closed-end, the main difference residing on whether or not the fund issues an unlimited number of units. The majority of mutual funds available in the market are open-end, meaning that units can be bought or sold at demand, with no limit to the number issued. Close-end funds, on the other hand, have a fixed number of units that must be maintained. This implies that, usually, shares are not redeemable by the fund, and must be sold on the market. Units of closed-end mutual funds are not created to meet demand either; in order to enter the fund one must also buy the desired shares on the market.
Bond funds Centered on liquidity, funds specialized in fixed income offer competitive returns at a relatively low risk.
Equity funds The investments are centered on capital growth, with a riskier approach that aims to result in higher return rates.
Dividend funds These funds focus their investments in preferred shares and quality common shares that consistently pay dividends.
Balanced funds Offering a combination of fixed-income securities and common stocks, balanced funds provide both income and capital appreciation. Furthermore, as portfolios are diverse, this type of funds attempts to diminish the risk associated with market volatility.
Specialty equity funds These types of funds invest in specific markets or industries that, the managers believe, can potentially outperform the overall markets.
International funds International funds offer the possibility to invest in certain world regions, opening possibilities in markets of more difficult access to an individual investor; combining international funds with more traditional investments can contribute to diminish exposure to economic fluctuations.
An exchange-traded fund or ETF is a type of investment fund that, unlike mutual funds, is traded throughout the day on stock exchanges. Holding assets such as stocks, bonds, commodities or currency, most ETFs intend to replicate the performance (or its opposite) of certain market index, building a portfolio based on the components of such index and its proportions. ETFs can also replicate the price of a commodity, such as gold.
ETFs are divided into shares, and traded as stock. Its shareholders are entitled to dividends and interests when available, as well as to any residual value in the case of liquidation of the fund.
While offering a portfolio diversification somehow similar to that of a mutual fund, ETFs present more tradability, making them attractive to many investors.
Known as derivatives because they derive their value from an underlying asset, options are contracts that give the buyer the right (but not the obligation) to either buy or sell such asset at a fixed price, on, or before, a specified date.
Usually, an option contract represents 100 shares of an underlying stock. Another common usage of options includes commodities or currency as the underlying asset. These alternatives turn options into effective hedges against declining markets, as well as tools for speculative purposes.
Call and Put options are two of the most popular derivatives amongst investors, giving the right to buy and sell a stock respectively. The holder (buyer) of a call is not obligated to buy the underlying stock; the writer (seller), however, is obligated to sell it.
The market price of these contracts is referred to as the option “premium”, whereas the price at which the underlying asset will be traded in the future is called the option “strike price”. Options will be exercised if they are “In the Money”, meaning that the strike price is equal to, or better than, the market price at the time of the settlement.
Whether or not an option can be exercised before its expiration date depends on the type of contract; while American options allow the holder to exercise the contract at any time before the arranged date, European options can only be exercised at the expiration date.
