Summary of securities
This summary section provides each security’s “BRTI” - the benefits, risks, and typical investor.
Common stock
- Capital appreciation potential
- Dividend income potential
- Market risk
- Inflation risk (short-term only)
- Business risk
- Financial risk
- Regulatory risk
- Liquidity risk (for unlisted securities)
- Seeks capital appreciation and/or dividend income
- Younger
- Risk tolerant (moderate to aggressive)
- Long term time horizon
Resources: ‘What is common stock?’ video
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
- Interest income
- Virtually free of default and liquidity risk
- Generally AAA-rated and considered safe
- 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
- Seeks consistent (monthly) income
- Generally older
- Comfortable with unknown maturity dates
Investment companies
- Instant diversification
- Provides professional management
- Risk depends on the type of fund
Types of funds
Growth funds
- Seeks capital appreciation
- Invests in common stock
- Higher risk potential
- Higher return potential
- Example: American Funds Growth Fund of America
Growth and income funds
- Seeks capital appreciation and income
- Invests in common stock
- Moderate risk potential
- Moderate return potential
- Example: Vanguard Growth and Income Fund
Balanced funds
- Seeks capital appreciation and income
- Invests in stocks and bonds
- Moderate risk potential
- Moderate return potential
- Example: T Rowe Price Balance Fund
Income funds
- Seeks income
- Invests in stocks and bonds depending on the type of income fund
- Risk and return potential depend on the type of income fund
- Example: JP Morgan Income Fund
High-yield bond funds
- Seeks income
- Invests in speculative (junk bonds)
- Moderate to high risk potential
- Moderate to high return potential
- Example: Blackrock High Yield Bond Fund
Conservative bond funds
- Seeks income
- Invests in investment-grade bonds
- Low risk potential
- Low return potential
- Example: Fidelity Conservative Bond Fund
MBS agency funds
- Seeks income from mortgages
- Invests in MBS from Ginnie Mae, Fannie Mae, Freddie Mac
- Moderate to low risk potential
- Moderate to low return potential
- Example: PIMCO GNMA and Government Securities Fund
Asset allocation funds
- Various asset mixes
- Asset mix may be static or fluid
- Example: Franklin Moderate Allocation Fund
Life cycle funds
- Type of asset allocation fund
- Asset mix becomes more conservative over time
- Example: State Street Target Retirement 2050 Fund
Money market funds
- Seeks preservation of capital
- Small income potential
- Invests in debt securities with one year or less to maturity
- Very low risk
- Very low return potential
- Example: Charles Schwab Value Advantage Money Fund
Specialized funds
- Invests in securities from specific industries or regions
- Moderate to high risk potential
- Moderate to high return potential
- Example: Morgan Stanley India Investment Fund
Sector funds
- Invests in securities from specific industries
- Moderate to high risk potential
- Moderate to high return potential
- Example: Fidelity Select Pharmaceuticals Portfolio
Real estate investment trusts (REITs)
- Equity REITs provide capital appreciation
- Mortgage REITs provide income
- Hybrid REITs provide capital appreciation and income
- Provide real estate diversification
- Unlisted and private REITs subject to liquidity risk
- Real estate may hedge against stock market risk
Hedge funds
- High liquidity risk
- High risk and return potential
- Suitable only for wealthy, aggressive investors
Direct participation programs (DPPs)
- High liquidity risk
- Tax benefits (losses passed through)
- Moderate to high risk and return potential
- Limited partnerships are a common type of DPP
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