Marketable securities are investments purchased to generate long-term income by banks or individuals. They differ from securities bought with the intention of selling in a short period of time. The main purpose of buying investment securities is to provide a source of income through price appreciation or payouts.
Several types of securities can be held for the long term. Two of the most popular categories include equity securities and debt securities. Within these areas, other categories exist, such as growth or value stocks and corporate or government bonds. Here are some brief breakdowns of the types of equity and debt securities that can be purchased and the associated risks.
Equity securities are financial instruments representing ownership shares in a company. Typical equity securities include common stock. They generally offer a higher rate of return over the long term than debt securities. However, if a liquidation occurs with a company, a common stockholder will be paid last after bondholders and preferred stockholders.
The intention to buy equity securities may be for value or for growth. Holding a diversified portfolio of the two is often done, depending on the risk tolerance of the entity or person holding them. Banks typically buy common stocks that pay regular dividends because of their low risk tolerance. These specific investment stocks are traditionally less volatile than growth stocks. Lower yield is the trade-off for holding stocks with lower risk.
Bonds, Common Stocks and Preferred Stocks
When a person is young, taking more risk in the long run can be a good idea as it will likely generate higher payouts. However, for seniors approaching retirement, choosing dividend-paying value stocks may be the best bet. In this scenario, choosing less risky investment securities, such as bonds, may also be advisable, depending on the risk tolerance of the entity or person making the purchase.
Common stocks are traded on stock exchanges like the New York Stock Exchange and NASDAQ. The United States Securities and Exchange Commission oversees and regulates these markets.
Another type of equity security is a preferred stock. Companies issue two types of stock, called common and preferred. Holders of common stock in a corporation may or may not be entitled to receive a dividend. Even if a company is profitable, a dividend may not be paid. In contrast, preferred shares can also be issued by a corporation. Investors who buy preferred shares have first claim on the dividends paid. If the company makes money and pays a dividend, preferred shareholders will receive payment first.
Debt securities are debt securities purchased to generate income under specific terms. They will usually have an interest rate and a maturity date. Examples of such investment securities include corporate, state and municipal bonds. In the case of corporate bonds, they are backed by the guarantee of the issuing company, which reduces the risk. If the terms of a corporate bond are not paid, a bank could seize the collateral, sell it, and use the proceeds to collect the debt.
The primary risk in purchasing debt securities is credit risk, which is the likelihood that the borrower will default on its obligations. The government provides US Treasury bonds (T-bonds). These are often presented as risk-free. The collapse of the United States government would likely have to occur for an investor to not get paid and lose the capital invested when holding Treasury bonds. The US government has an excellent credit rating and is used to repaying the terms specified by the treasury bills it issues.
Corporate bonds offer many benefits and risks. The advantage of buying these investment securities is the regular cash payment that can be received. This item differs from common stock, which is typically purchased to make money from price escalation and does not earn any income in the form of dividends. Corporate bonds offer greater income certainty in this example. Bonds tend to be less volatile and less risky than stocks. For bond investing to be successful, a company must survive and repay its debt. In contrast, successful stock investments require a company not only to survive, but also to steadily increase its profits.
Rating agencies rate corporate bonds to help investors assess the risk of buying them. High yield bonds, or junk bonds, can be purchased at the lower end of the investment rating spectrum. Although they may offer a higher yield, they are risky to buy due to the high risks of default or bankruptcy. Low risk corporate bonds will be rated AAA, AA, AAA or BBB. These types of bonds may not pay as much at the end of maturity, but have excellent stability.
Mutual funds are available in several types. They are often created with a specific theme, which may include investing in particular sectors, such as gold or real estate. They can also be used to hold a portfolio of securities in companies of specific sizes, which may include small, mid or large capitalization investments. In this example, buying mutual funds in a small cap company could be done to generate higher gains, as these investment securities are often more nimble than larger companies. They can capitalize on opportunities faster, allowing them to grow results faster than a large company. When a small business completes this action, it can create a profitable increase in its price per share.
One of the main purposes of using mutual funds in an investment portfolio is to diversify risk. In the case of an individual, their tolerance for risk will depend on their income, expenses and personal responsibilities. A younger investor may have a higher tolerance for risk and decide to invest in riskier securities, such as small capitalization companies. Due to its diversification, doing it through a mutual fund is a safer way to invest. If one or two of the companies included in the mutual fund go bankrupt, the investor’s portfolio will not be wiped out, which could happen if he buys common shares of only one small-cap company.
Gold was one of the earliest forms of investment securities. In ancient times it was used as an alternative to money. Now it can be purchased using mutual funds. The price of gold is determined by transactions carried out 24 hours a day, 7 days a week. Supply and demand have a significant influence on the price of gold as well as market conditions. Economic and political conditions can influence the price fluctuations of these shares.
Buying real estate for long-term capital growth is often done through mutual funds. These investment securities can be created using a diversified portfolio of different types of assets. It can be residential, office, retail, self-storage, industrial, and many other types of real estate. A final portfolio will likely have multiple holdings and be under active management. This measure is taken to ensure good diversification and a return that corresponds to the risk potential.
Investment Securities – Objectives
Having an investment objective when buying long-term securities is essential. If an individual or bank is looking for steady cash flow, it may be better to use bonds or dividend-paying securities. In contrast, when the goal is to make gains based on a company’s ability to grow profits, buying growth stocks or these types of mutual funds may be the ideal choice.
Another important factor to consider when buying investment securities is risk tolerance. As noted, different securities have higher and lower risk factors, making it essential to evaluate each financial instrument before buying. Investors with a higher risk appetite may want to hold a portfolio with riskier investments, such as stocks or mutual funds in growing companies. An older person who has more to lose if the value of their portfolio drops will likely be in a better position to buy bonds bearing a specific interest rate or stocks paying dividends. Banks are likely to choose the latter as they need to ensure that their assets are invested in safer securities.
Investment Securities – The End Result
Investing in long-term securities can be done in several ways. This action will often depend on which options best suit the purposes of the investment objective. For weekly insights on investment securities, stocks, crypto and more… sign up for one of our top investing newsletters. Join millions of other people who have signed up and are now making smarter, more profitable investments.