Characteristics of Various Types of Securities

An overview of some common types of securities in terms of two basic characteristics: Expected Return and Risk.

E Q U I T Y S E C U R I T I E S	TYPE	EXPECTED RETURN	RISK
	Common Shares. Represent ownership of a company. Shareholders have the right to elect directors; to vote on certain corporate matters; and to share in any residual assets of the company if it is wound up.	May take the form of dividends or capital gains/losses. Many companies try to pay dividends regularly. Others may not pay dividends at all. Often, return will depend mainly on changes in share price, which can go up or down, sometimes dramatically.	Moderate to Very High. Based on company profitability, financial stability, management capabilities, exposure to economic slumps, foreign exchange, and competition. Common shareholders are last to claim assets in cases of insolvency.
	Preferred Shares. Typically give holders the right to a fixed dividend before any dividends can be paid to common shareholders. Shareholders may have no voting rights, but special features on redemption or conversion of preferred shares into common shares exist in many cases.	Dividends are generally fixed, but company may reduce or suspend dividends. Capital gains potential is usually less than that of common shares. Conversion and redemption privileges and other special features may enhance potential for price increases.	Moderate to High. Comments regarding common shares apply. Reduction or expected reduction in dividends may significantly impact share price. Tax authorities, employees, and creditors have claim on assets before preferred shareholders in cases of insolvency.
D E B T S E C U R I T I E S	TYPE	EXPECTED RETURN	RISK
	U.S. Savings Bonds. A loan by an investor to the federal government. Various forms. Purchase at half face value or face value. Limits on purchase.	Depending on form, earn market-based interest rate (adjusted every six months) or a fixed rate of interest plus a semiannual inflation rate.	Very Low. Backed by the general credit and taxation powers of the federal government. Virtually no risk of default.
	Bonds. A loan by an investor to the government or a company. Issuer generally promises to pay a specified rate of interest and to repay a certain amount (the face value of the bond) at maturity.	Interest usually paid at a fixed rate. Market value may be affected by changes in the issuer’s credit rating or as returns on competing securities change.	Low to High. Depends mainly on risk that the issuer will default on payment obligations and risk that prevailing interest rates will increase, pushing value of bond downward.
	Note: The actual rate of return, or yield, earned on a bond depends on the price paid for the bond and the time remaining until maturity. A bond paying a 7% nominal rate of interest will pay $70 per year for each $1000 of face value. If the bond is bought for only $950, the actual rate of return will be higher than 7%. Calculating the precise yield can be complex.
	Certificates of Deposit (CDs). Short-term, interest-bearing savings certificates issued by banks or brokers. Bear a maturity date and a specified interest rate. Can be issued in any denomination.	Investor receives principal and interest at maturity. Banks set most CD rates, but some rise with interest rates, or are variable. A penalty may be assessed if money is withdrawn early	Low. Bank-issued CDs are insured up to $100,000 by Federal Deposit Insurance Corporation (FDIC). Broker-issued CDs are not insured.
	Treasury Bills (T-Bills). Short-term notes sold by the U.S. Treasury at a discount of their face value. Face amounts begin at $10,000; increase by $5,000. Maturities of 90, 180, or 360 days.	Investor receives face value upon maturity. Return is determined by the difference between the purchase price and the value of the T-Bill at maturity.	Very Low. Have low volatility and are backed by the federal government. Market values may be affected somewhat by changing market interest rates.
I N V E S T M E N T F U N D S	TYPE	EXPECTED RETURN	RISK
	Money-Market Mutual Funds (MMMF). Funds that pool money from large numbers of investors and use it to buy short-term investments, such as T-Bills and commercial paper. Can buy tax-exempt municipal securities or U.S. Treasury securities.	Returns rise and fall as money market rates rise and fall. Yields can vary greatly.	Low to Moderate. Generally considered low-risk as securities in the fund are liquid, short-term debts. Can be volatile.
		Note: Expected returns from any type of investment fund are also affected by the fees and expenses charged for the management and operation of the fund.
	Mutual Funds. A pool of investments purchased with money form numerous investors and managed by a professional money manager. Ownership is in the form of shares, which represent a portion of the fund’s holdings.	Returns include dividends, interest, capital gains, or other income earned by the fund. May also include increases or decreases in value of the fund’s shares. Returns depend on fund’s investment objectives, described in a prospectus, and success in achieving them.	Low to Very High. Risk depends on the type of securities or other assets (bonds, stock, real estate, etc.) in which the fund invests.
	Closed-End Funds. Much like a mutual fund, but shares are not issued or redeemed on an ongoing basis. A finite number of shares are issued and then listed on an exchange for trade among investors.	Comments concerning Mutual Funds apply.	Low to Very High. Comments concerning Mutual Funds apply.
		Note: In the U.S. alone, trillions of dollars are invested in mutual funds.
O P T I N S & F U T U R E S	TYPE	EXPECTED RETURN	RISK
	Options. Options give the holder the right to buy (“call” option) or sell (“put” option) a security at a specific price for a specific period of time. Many are traded on exchanges. Holder of an exchange-traded option may sell it, exercise it to buy the underlying security, or let it expire.	Options do not pay dividends or interest. Returns depend mainly on changes in market value of underlying security. Market value tends to decline as expiration date approaches.	Moderate to Very High. Options are a form of leverage. As such, values generally fluctuate more than values of the underlying security.
	Futures Contracts. Agreements in which the seller agrees to deliver to the buyer a specified quantity of an asset at a specified price on a given date. Exchange-traded futures contracts (exchange contracts) trade on standardized terms, and transactions are settled by a clearing agency.	Returns depend mainly on changes in the value of the underlying asset.	Very High. Can be very risky. Generally suitable only for very sophisticated investors. Often used by commercial enterprises as “hedging tools” to reduce risk of expected future purchases or sales of underlying asset.
		Note: Futures contracts are traded on all kinds of commodities (grain, meat, metals, energy products, etc.) and financial products (bonds, currencies, etc.).