Here we explain more about securities, the different types of securities and the potential pros and cons of adding securities into your investment mix.
What are securities?
A security is generally any financial asset or investment that holds some kind of monetary value and can be traded. An example could be shares in a company listed on the Australian Stock Exchange (ASX) or a government debt bond that will repay you with a fixed interest rate. You can purchase and trade in securities on financial markets in the hope that you may earn a profit on top of your original investment. Keep in mind, however, that you can also lose money on investments and previous returns are not a reliable indicator for future performance.
What are the different types of securities?
The three main types of securities are equities, debt and hybrid securities.
An equity security allows you to purchase and take ownership in an asset via, for example, the shares of a listed company.
If you invest in a debt security, you essentially loan money to either a government or corporate entity by purchasing bonds. The entity will then provide you with periodic repayments of the principal loan amount, plus an agreed fixed interest amount.
Hybrid securities are financial instruments which combine elements of both equity and debt securities. A common example is known as a convertible debt security. With this type of hybrid security, you may invest in a debt security of an organisation through the purchase of a corporate bond and, at a specified future date, you may convert this into an equity security, such as shares in the company.
How can I invest in securities?
Investors can generally invest in securities in a number of ways, such as through an online share trading account or full service stockbroker; or via an investment fund, like a managed fund. The option that suits best could vary depending on the amount of money you are investing, your level of investing expertise and the types of securities you wish to invest in. The amount you pay in fees is likely to vary depending on how you choose to invest.
Superannuation is also generally invested at least partly in securities, such as shares and fixed interest assets.
If you are considering investing in securities, it may be worth consulting with a financial adviser before getting started.
Should I start investing in securities?
Investing in securities is not for everyone. There is an element of risk involved and positive returns are not guaranteed. It can also require a lot of time and research. Equity securities, such as shares, can carry higher risk than other investment options, but the returns may be greater.
On a risk–return basis, debt securities such as bonds can be a safer option than shares but usually carry more risk than cash. Including bonds in an investment portfolio may help offset the higher risk inherent in shares, according to Vanguard’s Tony Kaye. The returns from bonds tend to move in the opposite direction to shares, so they can act as a buffer to the volatility in shares.
Ultimately, the decision to invest in securities may be best made once you have clear goals in mind for your investments and have balanced your goals with the level of risk you are willing to take on. Keep in mind that past performance is not a reliable indicator for future performance. You may like to seek professional advice to support you if you are considering making investment decisions.
What are the pros and cons of securities?
The pros and cons of securities can vary depending on which type you’re thinking about investing in. Here’s a summary of some of the factors that could be worth considering, according to the Australian Securities and Investment Commission (ASIC) and the ASX.
- Potential for higher returns compared to other investment options
- Some equity securities pay dividends, which can provide additional income and may offset potential declines in the share price
- Stock prices can rise and fall dramatically
- No guaranteed returns
- Prices generally fluctuate less than equity securities
- Regular periodic payments at a fixed interest rate can provide income stability
- Typically lower long-term returns than equity securities
- Prices are impacted by the rise and fall of interest rates, generally more so than other types of securities
- Can provide a regular income similar to debt securities
- Can pay either a fixed or floating rate of return until a specified date
- Usually offer a higher potential rate of return than pure debt securities
- Potential to benefit from anticipated movements in interest rates and equity prices
- As with equity securities, the value can fall dramatically
- Can be complex to understand all the features and risks involved in the specific product as each hybrid security is unique
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