When learning about investing, people hear a lot of terms. It is easy to get confused. When discussing securities, you’re basically just talking about things you already know but haven’t realized it. Equities fall into two basic categories and combine to make a third category. The following is a brief overview of these categories and if you’re interested in actually investing, you should talk to someone with tax trader status. It’s important you get advice before putting any money into any form of investment.
Equity securities refer mostly to stocks: publicly traded shares of ownership of a company, partnership, or trust. The investor makes money from selling the shares at a higher price, also known as capital gains, or by receiving a dividend from the entity issuing the shares. Dividends are a portion of the entity’s profits spread out amongst the shareholders.
In short, equity means profit, so buying equity security means you have a way to make a profit from the investment. Be aware of any profit made from investing in equity securities, because they can be subject to taxation, even dividends. This is called a capital gains tax, and it can be anywhere from 0%, 15% or even 20% depending on income and filing status. Make sure you get help when preparing your income tax return in order to avoid having a high tax bill because you made a mistake somewhere.
Debt securities mainly refer to bonds. This doesn’t mean you go into debt investing in these, not unless the entity issuing the bond goes out of business. No, it refers to the fact the entity issuing the bond goes into debt issuing the bond. They are using the bonds as a way to raise money, and when the bond comes due, they owe you the money you loaned them plus interest. Bonds are safer than stocks, but only if the entity remains solvent over the life of the bond.
Hybrid securities are a combination of both stocks and bonds. An example of a hybrid equity security is an equity warrant. These allow shareholders to buy shares at a special price during a specific time such as a limited time sale on shares.
An example of a hybrid debt security is a convertible bond. These are bonds that can be turned into shares in the issuing entity. Entities will issue convertible bonds when their money is tight but their stock is on the rise. The bonds are converted into common stock shares in the hopes the price of the stocks they are converted into will be higher than the market price of the stocks thus encouraging the holder to sell. This then greatly reduces the entity’s debt.
Five Ways to Invest for Retirement is a great article to read about the basics of investing if you want to do further research on the topic of investing in general. The author, and the site, both have a lot of useful information about investing, and not just in securities.
To learn more about securities and the market they are traded in, Investopedia.com explains more about the SEC, the Securities and Exchange Commission.
The information above is just a trio of the types of securities you can invest in. There are more, far more, but these are the best ones for the beginner. They will help you get a toe wet in the ocean of investing and get some experience to keep you from drowning. Securities trading and investing isn’t something to be scared of. They are just another vehicle to make money for retirement, or anything else you need money for and have time to save.
This article is only intended to inform, not to advise. Investing is not a sure-fire way to make money, and everyone has their own reason for wanting to invest. Knowing how much you have and how much risk you want to take, along with having more than a passing idea of what investing entails, will go a long way in helping you make wise decisions about what to do with your money.