Types of Securities for Private Investors

Types of Securities for Private Investors: A Comprehensive Guide to Selection

Introduction

Today, private investors can choose from a plethora of financial instruments: stocks, bonds, funds, derivatives, and structured products. Each type of security combines unique characteristics of risk, return, and liquidity. A deep understanding of their features aids in forming a portfolio that aligns with one’s investment goals, time horizon, and risk tolerance. In this guide, we will explore the types of securities, analysis methods, real-life examples, and provide templates for autonomous selection of instruments in global markets.

When conducting analyses, it is crucial to consider macroeconomic trends, technological changes, and geopolitical risks to adapt strategies to the rapidly changing world of investments.

Stocks

Ordinary vs. Preferred

Ordinary shares provide voting rights at the general shareholder meeting and variable dividend yield. Preferred shares typically do not have voting rights but offer fixed dividends and a priority claim on capital distribution during liquidation.

For instance, companies in the oil and gas sector often issue “prefs” with dividend yields of up to 10%, which attracts investors seeking stable income.

Income Mechanisms

An investor's income comprises two components:

• Dividends: regular payments from net profits. For example, Coca-Cola has paid dividends quarterly for over 60 years.
• Capital Gains: growth in the market price of the stock. For instance, Apple has increased its stock price more than 20 times over the past decade.

Buying and Trading

Stocks are purchased through brokerage accounts on stock exchanges. The minimum lot and commission costs depend on the broker and exchange. American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs) are used for foreign stocks, traded in domestic markets. Consider liquidity, trading volume, and spreads when selecting.

Case Study: IPO and Long-term Growth

During 2020-2021, investors who bought Airbnb and Snowflake shares at IPO witnessed significant capital gains due to a strong recovery in post-pandemic service demand and the rise of digital platforms.

Bonds

Government vs. Corporate

Government bonds (OFZ, Treasuries) are viewed as instruments with minimal credit risk, offering low yields and high liquidity. Corporate bonds provide higher coupons but carry the risk of default, as determined by credit rating agencies.

For example, Russian OFZ with a 7% coupon and a 3-year maturity are popular among conservative investors, while Gazprom bonds with a 9% coupon attract those willing to accept moderate credit risk.

Coupon and Yield to Maturity

The coupon is a fixed percentage of the nominal value paid regularly. The yield to maturity (YTM) accounts for the current market price, coupons, and nominal value, reflecting the actual yield when held to maturity.

Terms and Liquidity

Bonds are issued for terms ranging from 1 to 30 years. Short-term bonds (1-3 years) are less susceptible to interest rate fluctuations, while long-term bonds (10+ years) offer higher coupons but greater price volatility. Liquidity is determined by trading volume and market demand for a specific issue.

Laddering Strategy

A “laddered” bond portfolio reduces interest rate risk and ensures a regular cash flow for reinvestment at current rates.

Funds: ETFs and Mutual Funds

ETFs

ETFs (Exchange Traded Funds) are exchange-traded funds that replicate index compositions. Their shares trade like stocks, with low fees (0.1%-0.5%) and high liquidity. They are suitable for passive investing and instant diversification.

Mutual Funds

Mutual investment funds are managed by professional managers. Open-ended mutual funds allow the purchase and sale of shares daily, while closed-end funds do so only at the end of the term. Fees are higher (1-3%), but active strategies are available, including credit funds, infrastructure, and alternative assets.

Comparison of ETFs and Mutual Funds

Derivatives and Structured Products

Futures

A futures contract obligates one party to buy or sell an asset in the future at a predetermined price. It is used for hedging and speculation. Trading requires collateral (margin), and risks may exceed initial investments.

Options

An option gives the right (but not the obligation) to buy (call) or sell (put) an asset at a strike price before or on the expiry date. It is used for position protection and to create complex strategies with limited losses based on the premium paid.

Structured Products

Instruments that combine bonds and options, providing capital protection and additional income upon meeting certain market conditions (e.g., index growth, currency appreciation).

Risks and Returns

Types of Risks

• Market: price fluctuations on the stock exchange.
• Credit: default by the bond issuer.
• Liquidity: inability to sell an asset quickly without losses.
• Currency: exchange rate changes when investing in foreign securities.
• Systemic: global crises affecting all markets.

Return Levels

• Stocks: dividends of 2-5% and capital gains.
• Bonds: coupon rates of 3-6% for government bonds, up to 12% for corporate bonds.
• ETFs/Mutual Funds: similar to indices, 5-15%.
• Derivatives: potentially unlimited returns, but also high risk.

Taxes and Commissions

Taxes

Dividends are taxed at 13% for residents and 15% for non-residents. Bond coupons are taxed at 13%, exempt under Individual Investment Accounts (IIAs). Profits from the sale of securities are taxed at 13% without an IIA.

Broker Commissions

Transaction fees range from 0.02%-0.3% of turnover, with minimum fees that may apply. There are plans with a subscription fee or "no deal" rates for infrequent trades. Additionally, consider exchange fees, custodian services, and currency conversion fees.

Investment Strategies and Diversification

Balanced Portfolio

Allocation: 40% stocks, 30% bonds, 20% funds, 10% cash. This combination reduces volatility while maintaining growth potential.

Aggressive vs. Conservative

Aggressive: 70% stocks, 20% funds, 10% bonds — high risk and return.
Conservative: 40% bonds, 30% funds, 20% stocks, 10% cash — low volatility, capital preservation.

ESG Investment

Integrating environmental, social, and governance criteria helps mitigate non-financial risks and supports sustainable development. ESG funds and "green" bonds are becoming increasingly popular among investors.

Case Study: Green Bonds

The green bonds issued by Sberbank, amounting to 50 billion ₽ with a 7% coupon, financed projects related to energy efficiency and waste recycling, providing stable income for investors while supporting ecological initiatives.

Conclusion

The variety of securities offers opportunities for implementing diverse investment strategies: stocks for growth, bonds for income, funds for diversification, and derivatives for advanced approaches. Analysing risks, returns, taxes, and commissions, along with prudent asset allocation and consideration of ESG factors, will form a robust portfolio to achieve financial goals.

Utilize this guide as a starting point, adapting your selection of instruments to personal objectives and global market trends.