Other Types of Securities
Beyond stocks and bonds, the financial markets host various other types of securities, each with its unique characteristics and risk-return profiles.
1. Preferred Stocks: These represent a hybrid security, combining features of both equity and debt. Preferred stockholders have a higher claim on a company’s assets than common stockholders but rank below bondholders. They often receive fixed dividends and may have the option to convert their shares into common stock.
2. Convertible Securities: Convertible bonds and preferred stocks allow holders to convert their securities into common stock. This feature provides investors with the opportunity to participate in potential stock appreciation while enjoying the benefits of fixed income.
3. Asset-Backed Securities (ABS): These securities are backed by pools of assets such as mortgages or car loans. Investors in ABS receive payments based on the cash flows generated by the underlying assets. Collateralized Debt Obligations (CDOs) are a type of ABS that gained prominence in the mortgage-backed securities market.
4. Options and Futures: Derivative securities, options, and futures derive their value from an underlying asset, index, or rate. Options provide the right, but not the obligation, to buy or sell an asset at a predetermined price, while futures contracts obligate the buyer and seller to transact at a future date and price.