Common Stock and Fixed Income Investments
Much of the investment universe may be further subdivided into common stock and fixed income galaxies. Common stock and fixed income securities offer distinct risk versus reward profiles due to their respective positions within corporate finance. Evaluate the characteristics of each asset class before building a diversified portfolio that remains in line with your life goals and investment objectives.
Fixed income securities, such as bonds and preferred shares, offer level interest and dividend payouts through a set time frame. Retirees who live on a fixed income expect level social security and pension payments for one year, before monthly payments are adjusted higher alongside inflation. Individual pension payments are typically drawn down from larger pools of bonds and insurance policies.
Alternatively, common shares do not pay guaranteed dividends. Financial managers set dividend policy according to corporate profits.
Corporations issue bonds, preferred shares, and common stock to raise financing. Bonds are credit securities, which means that corporations are legally obligated to pay out interest, before returning capital back to owners, or shareholders. Next, in turn, preferred shares are senior to common shares. Preferred dividends are cumulative and must be paid before any common stock dividends are paid out.
Corporations pay out dividends at their own discretion. Alternatively, corporations go into default and may ultimately file bankruptcy due to missed interest payments. Corporations must then liquidate, or sell off assets, to pay off bondholders.
Risks Versus Returns
Bonds and preferred shares are relatively safe investments due to their senior asset claims. Here, investors must be willing to accept minimal growth, in exchange for safety of principal. Fixed income, of course, is highly susceptible to inflationary risks.
Shareholders are owners; and returns are highly correlated with corporate profits. Share prices may swing wildly between zero and infinity through regular business cycles. Diversified portfolios preserve principal, while still offering growth potential.