Security Investments CB

Securities are often classified into two broad groups on the basis of the income they provide to their owners. Fixed-income securities promise to pay their holders a given amount of money at periodic intervals during ownership. These payments are specified at the time the securities are originally issued and do not normally change. Variable-income securities do not specify any monetary payments. Rather, payments to the holders of these securities depend upon the economic fortunes of the issuers so that if the issuer prospers, it is quite likely that payments to the holders will be increased. On the other hand, a period of poor economic activity may well produce a reduction or even an elimination of payments to the holders of variable-income securities.

In addition to securities that clearly fit into one or the other of these categories, there are other types that straddle the classifications. For example, certain issues of fixed-income securities can be converted into variable-income securities at the option of the owner. There are also security options available which give their holders the right to acquire other securities at a fixed price. These securities are sometimes purchased directly from a corporation and sometimes from another investor.

In this chapter we will discuss characteristics of the three major types of corporate and government securities that are available to investors: bonds, preferred stock, and common stock. A later chapter of this book is devoted to a discussion of options to purchase securities. Separate chapters are also reserved for developing an analysis for the selection of both fixed-income and variable-income securities.

Investment securities originate from both the private and public sectors. Corporations obtain funds for constructing plants and purchasing equipment by borrowing money and by selling shares of ownership. The majority of borrowing from investors occurs through the sale of bonds which are long-term IOU’s. Most ownership shares sold by corporations are of a form called common stock, although another form, preferred stock, is also used occasionally; these two basic forms of ownership are different in nearly every respect.