Tue | Jun 18, 2019

Oran Hall | Investing in bonds and preference shares

Published:Sunday | June 2, 2019 | 12:11 AM

QUESTION: I am interested in knowing more about bonds and preferred stocks, like the minimum amount one can use to purchase either of them. Is there a book or a website about local bonds and stocks that I may refer to? Can I purchase international shares locally?

– Damion

  FINANCIAL ADVISER: Bonds are debt instruments. They are certificates that are evidence that the issuer has borrowed a stated sum from the lender, that the borrower will pay interest at a stated rate and on set dates and will repay the principal on a stated date, described as the maturity date.

  Bondholders are entitled to the payment of interest before preference shareholders and ordinary shareholders receive dividends, and to the return of principal before those shareholders in the event of the liquidation of the issuing company.

  The interest on a fixed-rate bond holds for the full term of the instrument and is calculated on the face value of the instrument. For example, a bond bearing an interest rate of 10 per cent per annum pays $10 per $100 – the face value, or par value, of the instrument – from the time it is issued to the time it matures. This applies even if the price of the bond is above or below the face value.

  Bond prices rise above or fall below par value because they trade at a price that allows investors who buy them from other bondholders, rather than from the issuer when they are first issued, to derive a return that is in line with market rates at the time the new owner is buying the bonds.

  Preference shares are similar to bonds in some ways and similar to ordinary stocks in others. Although they rank above ordinary shares in the payment of dividends and above them in return of principal in the event of liquidation, they rank below bonds.

  Dividends are paid at a fixed rate at pre-­determined dates, and principal is returned to the shareholders if the shares are redeemable. There are some preference shares that are issued in perpetuity, as is the case with ordinary shares.

  The directors of the company determine if dividends are paid, similar to the case of ordinary shares, but companies have no legal obligation to pay preference dividends. There are some preference shares that have a cumulative feature whereby dividends not paid in one year accumulate and are paid in subsequent years.

  Like bonds, the prices of preference shares are influenced by changes in interest rates in the financial market. Their price generally increases when interest rates decrease and decreases when interest rates increase.

  Generally, investors are able to purchase a minimum of 100 preference shares listed on the Jamaica Stock Exchange, but very few are listed on the local market. How much you pay is a function of the unit price of the shares.

  Almost all of the bonds which trade in the Jamaican market change hands on the over-the-counter market rather than on the stock exchange. Many of the local securities dealers accept orders of no less than J$1 million.

READING MATERIAL

  I am not aware of any book that takes a comprehensive look at local stocks and bonds, but you can find useful resources on stocks on the website of the Jamaican stock exchange – www.jamstockex.com.

  Just as investors resident in Jamaica can buy securities on the Jamaican market, they can also invest in foreign markets through local investment houses which offer the facilities for doing so. There are two general approaches and they differ in relation to the level of involvement that the investor has in trading and managing the investment portfolio.

  In one case, the investor can buy a single security and hold it under a custodial arrangement with the Jamaican investment dealer whose corresponding broker abroad executes the trades. In this arrangement, because the securities are held in the name of the local dealer, clients will not see securities registered in their names and cannot view the ­portfolio online.

  There is a different kind of arrangement for ­clients with deeper pockets – a managed account. There are two types, one with partial discretion and the other with full discretion. The securities are also held under a custodial arrangement with the Jamaican dealer. Under the partial discretionary arrangement, the dealer consults with the investor on proposed actions, but does not do so in the case of full discretion.

  The licensed securities dealers are in a good position to help you invest in the local securities market and markets abroad. By checking online, you will be able to source information on how to make contact with them.

  

- Oran A. Hall, the principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. finviser.jm@gmail.com