Summary of securities | Customer funds & securities | Ethics

Capital appreciation potential
Dividend income potential

Systematic risks

Market risk
Inflation risk (short-term only)

Non-systematic risks

Business risk
Financial risk
Regulatory risk
Liquidity risk (for unlisted securities)

Stock sizes are commonly measured by market capitalization, which can be calculated by multiplying the stock’s market price by the number of shares outstanding. For example, let’s take a look at Nike (ticker: NKE), which was trading at roughly $127/share (as of May 2023) with 1.25 billion shares outstanding. Let’s find their market cap.

Seeks capital appreciation and/or dividend income
Younger
Risk tolerant (moderate to aggressive)
Long term time horizon

Resources: ‘What is common stock?’ video

Sidenote

Market capitalization

The size of a company influences the risk profile of a stock investment. Smaller companies tend to be riskier, while larger companies are usually safer. When a risk materializes, smaller companies have less capital (money) and resources to “weather the storm.” For example, the stock of a start-up company is traded far less than large, well-established companies, which results in liquidity risk.

$MC = Shares outstanding x market price$

$MC = 1.25 billion x $127$

$MC = $158.75 billion$

Nike is considered a large-cap company (discussed further below), and would most likely survive an economic recession given its prominence, resources, and size. This isn’t always the case, as some large companies have quickly imploded in the past. Lehman Brothers had a market cap of $60 billion in 2007, only to file for bankruptcy in 2008.

From time to time, you encounter a practice question referring to market capitalization, which is a clue into the size of a company. Most of the time, it’s a hint alluding to the risk profile of an investment (e.g., large-cap stocks are less risky than small-cap stocks). These are the specifics:

Mega-cap

$200 billion or more

Large cap

Between $10 billion - $200 billion

Mid-cap

Between $2 billion - $10 billion

Small-cap

Between $250 million - $2 billion

Micro-cap

Less than $250 million

Preferred stock

Dividend income
Capital appreciation if convertible

Dividends not guaranteed
Interest rate risk
Inflation risk
Call risk
Reinvestment risk

Seeks income
Accepts moderate risk in return for higher income
Corporate investors (dividend tax exclusion)
Long-term time horizon

General debt securities

Interest income, which is legally guaranteed

Interest rate risk
Inflation risk
Default risk
Liquidity risk
Legislative risk
Political risk (foreign debt securities)
Reinvestment risk
Call risk

Seeks income
Generally older
Risk-averse (conservative)

Corporate debt

Interest income
Capital gain potential for convertible bonds
Higher yields (vs. other debt issuers) due to risk
Variety of choices and risk profiles

Interest rate risk
Inflation risk
Default risk
Liquidity risk
Legislative risk
Political risk
Reinvestment risk
Call risk

Seeks income
Generally older
Willing to take higher risk (vs. other debt issuers)

Certificates of deposit

Interest income
FDIC insurance up to $250,000 per bank

Low yields in exchange for safety
Interest rate risk (particularly for long-term brokered CDs)

Willing to accept low yields in exchange for safety
Typically older or elderly

Municipal debt

Tax-free interest income for residents
Typically safe securities

Low yields (opportunity cost)
Interest rate risk
Inflation risk
Some default risk (although low)
High liquidity risk
Reinvestment risk
Call risk

Seeks income
High income / wealthy
Willing to accept lower yields in exchange for tax benefits

US Government debt

Benefits

Interest income
Virtually free of default and liquidity risk
Generally AAA-rated and considered safe

Interest rate risk
Inflation risk (except TIPS)
Reinvestment risk (except STRIPS)

Seeks income
Generally older
Willing to accept lower yields in exchange for safety

Mortgage-backed securities

Monthly income (interest and principal)
Direct or indirect US government backing
CMOs offer more predictable outcomes

Prepayment risk
Extension risk
Interest rate risk
Reinvestment risk
Inflation risk