Our
team at MsFinancialSavvy.com does trade shows
and lectures on financial education from time to time. During
our shows and lectures, we have repeatedly encountered investors
who own investment products they don't understand. In other
words, they don't know what they have purchased. It is imperative
that you understand a financial product offered to you by
a financial agent. Understanding your product starts with
understanding the definition of your product and ends with
through research of that product, before you purchase it.
Subsequent to this article, there will be a follow up article
that will feature information on investment research.
The descriptions of the following types of securities are
only general guidelines. Many other types of securities exist
and each, including those listed, has variations. Therefore,
your determination as to risk and suitability will depend
on your analysis of all the factors related to each separate
investment opportunity.
Certificate of Deposit (CDs) are negotiable securities issued
by commercial banks against money deposited for them. They
vary as to dollar amount and maturity. For CDs under $100,000,
the maximum interest payable is fixed by the Federal Reserve
Board. They are usually recommended for investors seeking
preservation of capital and safety and are guaranteed by
the FDIC subject to limitations.
Money Market Funds are mutual funds that invest short-term
debt instruments such as U.S. Government Securities, bank
CDs and other types of commercial paper. They are usually
appropriate for investors who want immediate income, low
risk and easy access to their funds.
U.S. Government Securities are negotiable debt obligations
of various federal government agencies. Since they are guaranteed
or backed by the full faith and credit of the United States
government, they are usually recommended for investors seeking
preservation of capital and income.
Corporate Bonds are debt obligations of a corporation. They
are usually appropriate for investors seeking income. These
bonds are rated widely as to risk and quality. The ratings
can be used to determine a match with investor goals and
suitability.
Annuities are contracts providing for a specified income
payable to an insured at regular intervals over a certain
period of time. They provide some capital appreciation and
are usually recommended for investors seeking preservation
of capital or safety.
Common Stock normally represents a voting ownership interest
in a corporation. Depending on the type and nature of the
corporation issuing the stock, it may be recommended to investors
seeking any combination of investment goals such as safety,
current income, growth and speculation. Characteristics to
consider are corporation's earnings and net worth, volatility
of stock price, the nature of the corporation's business
and whether the stock can be resold on one of the listed
exchanges or in other public markets.
Preferred Stock normally represents a non-voting ownership
interest in a corporation. Preferred shareholders usually
receive fixed dividends that are senior to, and payable before,
any common stock dividends and they may also have preference
in the distribution of assets. Preferred stock is normally
recommended for investors seeking income. However, like common
stock, it may be suitable for other investment strategies
depending on the characteristics of the corporation.
Mutual Funds are investment companies that make investments
on behalf of individuals and institutions that share common
financial goals. The suitability of a particular mutual fund
for an individual investor depends on the type and nature
of the fund's investments and amount of diversification.
Funds are rated widely as to risk and return, and such ratings
can be used to establish a match with investor goals and
suitability.
Derivatives are contractual relationships established by
two or more parties where payment is based on or derived
from one or more standards. Therefore, the only limit to
the types of derivative products is the realm of human imagination.
Common derivative products are futures, options, forward
contracts, stripped mortgage-backed securities and structured
notes. Derivatives are speculative in nature and generally
suitable only for sophisticated investors.
Real Estate Investment Trusts invest in real estate properties
or mortgages. They are typically suitable for investors seeking
capital appreciation and income. They are not generally suitable
for investors seeking safety of capital and liquidity. Characteristics
to consider in these types of investments are the amount
leveraged, the program's track record of performance, size
of the public market, and the organizer's experience, past
performance and compensation (particularly amounts earned
regardless of program earnings).
Limited Partnerships are a form of business organization
operated under the management of a general partner. Consequently,
their limited partners have no responsibility for managing
the partnership's operation and can normally be held liable
only to the extent of their investment and any income received.
It is generally difficult for investors to sell their interests
in limited partnerships; therefore, they are not suitable
for investors seeking liquidity and/or safety of capital.
Characteristics of a limited partnership to consider are
the amount leveraged, the general partner's experience, past
performance and compensation (particularly amounts earned
regardless of program earnings). Voting rights are also important
because they can determine if and under what circumstances
the limited partners can remove and replace the general partner.
Convertible Securities are securities bought with an investor
right (usually conditional) to convert the securities to
another form. Examples include preferred stock purchased
with rights to convert it to common stock at a later date
or debentures purchased with rights to convert them to common
stock. Convertible securities are often issued to reduce
the risk or increase the possible return of the initial issue.
They are generally more suitable for sophisticated investors.
Private Placement Securities are securities, which by law
are prohibited from sale to the general public. Generally,
they are only allowed to investors who are sophisticated
or have a pre-existing relationship with the entity issuing
the securities. Typically, the securities represent investments
in new, small, illiquid and speculative ventures. As no formal
market for these types of securities exist, they are generally
only suitable for sophisticated investors. Unless an investor
can afford to do without the invested funds for a very long
time, or worst case, lose their entire investment, this type
of investment should not be considered.
Lois Center-Shabazz is the founder of MsFinancialSavvy.com and author of the
3-time award-winning personal finance book, Let's Get Financial Savvy! ISBN #0971979502.
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