Investing is not an easy job, and it is even more difficult when there is some element of debt involved. You may have heard about debt securities and may even contemplate on investing in it but are you sure that you know the features of it? Do you know what the difference between debt and equity securities is? Are sure about which one to invest in and to want amount? Well, all these questions are very important to answer so that you can make an educated and well-informed decision.
When you consider investment securities in broader terms, there are ideally two categories in which it can be sub-grouped: equity and debt. Explaining it in more accessible and more commonly used terms equity securities are the stocks and debt securities are the investment bonds.
Debt issuers usually sell bonds to investors. This is the most common way of borrowing money. As for the securities aspect, these bonds can be sold or bought easily in the secondary markets. All these debt securities will provide you with a high potential return that is significantly different from the stock markets.
Types of Debt Securities
Ideally, there are three broad categories of debt securities.
- Government bonds are the debts that are usually issued by the US government. These types of debts are the notes, Treasury Bills and bonds. It can also be other debts that have some support from the federal government. These debts include mortgage-backed securities that have implied or direct government guarantees underlying.
- Municipal bonds are usually those debts that are issued by the state and local government. The most significant feature of the municipal bonds is that these pay tax-free interest.
- Lastly, corporate bonds are issued by the private and publicly traded companies. These bonds are further sub-grouped into investment and non-investment grade bonds of which the non-investment bonds are often termed as junk bonds.
You can buy newly issued debt securities directly from the U.S. Treasury. All you have to do is open an account in the website of the Treasury and link a bank account to it. Once done you are ready to place orders for the upcoming notes, Treasury bills, and bond auctions. You can earn on these Treasury securities at the same rates as the big institutions. However, be informed that there is an active secondary market for the purchase and sale of Treasury securities.
Investing in debt securities
Prudent investors will buy or sell individual debt securities of any type through an account with a broker or a bond dealer. There are lots of such brokerage firms, and almost all of these firms handle bonds as well. However, if you want to invest in municipal or corporate bonds, it is recommended that you work with an experienced investment advisor having adequate knowledge and understanding about the bond markets, the different types of securities and choose the right one according to your investment goals.
All municipal bond investors usually work with dealers and brokers who specialize in bonds that are local tax-free issues. As all these bonds are marketable securities, you can buy or sell these bonds after an issue and before its maturity. You may follow advanced strategies in bond investment such as finding those bonds that will increase in value and at the same time will pay high interest.
Funds and unit trusts
Taking a cue from the nationaldebtreliefprograms, you may have also heard about funds and unit trusts often. Well, these are useful and effective instruments to use for your debt security investment endeavor.
- You can purchase unit trusts and funds that invest in bonds. There are different types of mutual funds such as closed-end funds and Exchange Traded Funds or ETFs.
- Unit trusts are a special type of investments that come in a package of different bond portfolios that have a definite maturity date. Usually, you should invest in no-load closed-end mutual funds if you want to do your research.
However, it is recommended that you take and follow the advice of an investment advisor when you invest in unit trusts and mutual funds for proper guidance. Remember, all these sell for a fee which is known as the load.
Different fund companies offer such funds from time to time, and these funds cover the entire range of debt security types.
Concept of financial asset & Equity Securities
Now the question is whether or not to consider security as a financial asset. Ideally, it is. All securities are financial assets that usually represent either a debt stake in a company or an ownership stake.
The owner of any equity security is considered as a part owner or a shareholder of the particular company. For this, you will have to purchase shares of the stock of the company.
On the other hand, a debt security is just a fancy name given to a bond. If you own debt security, it will mean that you had loaned money to a company or any government entity when you purchased the bond. The company or government entity in return promises you to repay the loan plus the interest accrued on it.
Different types of financial assets
Starting with the equity securities, these financial assets provide you the power to claim on the profits of the particular company whose equity share you hold. You will receive a dividend check, and the amount of profit share will depend on the number of equity shares you own. You also have the right to sell your share if you want to cut losses or to take profits at any time. Apart from that, the owners of equity shares also possess voting rights as well according to their shareholding proportion in a few major corporate decisions.
Debt securities, on the other hand, are issued by different companies and government entities from time to time in order to raise fund to finance their business operation.
Therefore, ownership of debt or equity securities represents wealth and can be easily and quickly converted to cash making it a liquid form of financial assets.