Secure Investment Securities

The term investment securities refers to a broad class of instruments purchased for investment purposes that provide a return based on the periodic payment of interest or dividends, and offers the opportunity for growth in value over time.

Investment securities are traded on stock exchanges, and are purchased and sold though licensed stockholders. Investment Securities are governed by Securities Laws and must be registered with the Securities and Exchange Commission.

The value of Investment Securities depends upon the earnings and the assets of the issuer, and therefore, on the issuer’s financial condition. The issuer is the company issuing the securities. The objective of investing in Securities is to minimize risk while realizing favorable returns on investment. There are two types of investment securities, Debt Securities and Equity Securities.

Debt Securities

Debt securities are basically promissory notes that pay interest and the return of principal at the end of a specified term.

Examples of Debt Securities are:

• US Treasury Bills, US Treasury Notes, US Treasury Bonds
• US government agency bonds (FNMA)
• State and local government bonds (general obligation and revenue)
• Corporate bonds
• Mortgage-Backed Securities (issued by large financial corporations).
• Collateralized Loan Obligations.
• Zero percent coupons are a special form of bond with some of the characteristics of a U. S. Saving Bond, in that all the interest is paid at maturity rather than periodically over the life of the bond.

Equity Securities

Equity Security is Stock ownership in a corporation. There are two types of stock: Common Stock and Preferred Stock. The most common Equity Security traded is Common Stock, representing a predetermined fractional ownership of a corporation (i.e. if a corporation has 1000 authorized and issued shares of common stock and you own 10 shares you own 1% of the company).

Preferred Stock has a priority claim on the dividends paid and has a priority claim on the value of the assets if the corporation is liquidated. Preferred Stocks are a hybrid security having characteristics of both bonds and common stock and are usually owned by other corporations because of the preferred tax treatment given to the dividends.

Security’s Ratings

There are two companies that grade Debt Securities, Standard and Poor’s and Moody’s Investors Service.

Tax Consequences

Dividends and interest received by an investor are taxed as ordinary income, subject to the current year’s tax rates in the year received, regardless if they were automatically reinvested.

Stock gains are taxed at the time of the sale or disposition. If held up to a year, the gain will be taxed at ordinary income rates, but only at the time of sale or disposition. A loss will be a write off against capital gains on the year of sale. Although Capital Losses deductions are limited to $3,000 per year, the unutilized balance can be carried over to subsequent returns indefinitely.

Risk   

There is a risk inherent risk with all investments, therefore, investing in securities, whether debt or equity, may require diversification. It is seldom prudent to put all your eggs in one basket.

A good diversification alternative would be to invest through a mutual fund, offering a portfolio of securities and professional management. There is a large universe of investment options when investing through mutual funds. The key is to focus on matching the fund’s investment objectives with your own objectives and risk tolerance.

Getting expert financial help

The expert advice of a professional financial planner is essential in identifying your best investment options, considering your risk tolerance and investment objectives, as well as the possible tax consequences.