Oran A. Hall, Contributor
I am a 21-year-old guy and I am very interested in the world of investment. What type of investment securities are out there and what are the risks of each security? Most of all, I am interested in real estate; how do I get involved in that market and invest in it?
FINANCIAL ADVISER: The main short-term instruments in the local market are Government of Jamaica Treasury bills and Bank of Jamaica certificates of deposit and repurchase agreements issued by financial institutions.
Treasury bills are issued at a discount to raise money for the Government of Jamaica and mature at face value or par. They may be bought at auctions held by the Bank of Jamaica, or on the secondary market from any of several licensed securities dealers.
T-bills and certificates of deposit are usually issued for periods ranging from 30 days to one year. Government securities are not deposits and are not covered by deposit insurance but are generally considered to be safe.
Repurchase agreements, commonly called repos, are investment contracts by which the seller of the investment instrument contracts to repurchase it from the buyer at a fixed price at an agreed future date, and to pay an agreed rate of return for the life of the contract.
Although a repurchase contract may be for 30, 60, 90, 120, 180, 270, or 365 days, and indeed any other period agreed between the contracting parties, the actual instruments being bought for resale may themselves have much longer maturities. These too are usually quite safe.
When you invest in a bond, you are really giving a loan to the issuer - whether government or a corporate entity - who commits to pay you interest at a rate which may be fixed or variable, and to repay the principal at a specified future date.
As a creditor to the issuer of corporate bonds, the bondholder has priority to assets before equity investors when a payout is being made due to liquidation or restructuring of an issuing company.
Strictly speaking, assets are pledged to secure a bond issue except in the case of government 'bonds, but the term is used loosely to describe any funded debt issue.
Bond prices move in the opposite direction to the direction of interest rates, meaning that the prices of bonds already in issue move up when interest rates move down.
Bonds bought at par and held to maturity will not cause a capital loss to the investor but, if sold before maturity, generate a capital loss or gain depending on whether interest rates are higher or lower than they were at the time of sale relative to the time of purchase.
Bonds bought at a premium or discount will generate a capital loss, or gain at maturity if they mature at par. In the case of corporate bonds, there is the risk of the issuer not being able to pay on time, or at all.
Unit trusts use the money derived from the sale of units to invest in securities and other investment assets, which collectively are called investment portfolios or investment funds. They generally value the funds daily or weekly.
The valuation takes into account changes in the market value of the assets of each fund and income earned between the previous and current valuation dates.
Stock prices fluctuate
Certain charges are then deducted and the result is divided by the number of units to arrive at the net asset value per unit.
Stock prices fluctuate and so do real estate values. Except in the case of very short-term securities, the values of fixed-income securities may fluctuate as interest rates change. These price movements naturally affect the values of unit trust units.
It is hardly likely, though, that funds that invest heavily in short-term interest-earning securities, or money-market securities, will lose value.
Capital growth funds do not put all of their money in stock or real estate; they also invest in interest-bearing securities to give them some liquidity and some level of protection in declining real estate and stock markets.
Treat them primarily as long-term instruments and not trading instruments.
Common or ordinary stocks represent ownership in a company and give the shareholder certain rights, for example, the right to dividends, if declared by the board. Stocks generally trade on the stock market and their prices are influenced by the performance of the company, the state of the financial markets and the state of the economy.
Although significant gains can be made by investing in them, there is also the risk of making losses.
Real estate is not a security but can be a profitable form of investment. You may buy residential or commercial .real estate through a broker, or directly from the vendor but you need deep pockets for the deposit and closing costs.
If you have very deep pockets or access to funds, you can develop real estate for sale or rent.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning. Send feedback to email@example.com.