Traded investments
The term traded investment refers to the buy of an investment asset which is traded in the financial markets. Instance includes government and ordinary shares, company bonds, preference shares, warrants and options or futures contracts. The series of such investments is therefore wide and it is important to recognise that each type of investment has unique characteristics in terms of its cost rate of return and risk. All of these factors should be taken into account when selecting an investment.
The price of bonds as well as shares will vary depending upon economic conditions and the financial performance of the individual companies. Interest rates directly influence the price of gilt-edged stock and corporate bonds such that as interest rates raise the price of a bond falls. This signifies a capital risk to the investor who cannot be certain of the price at which the bond can be sold. This indecision is counter-balanced by the fact that such investments offer a fixed rate of return. If an investor purchases for instance 10% Treasury Stock 2001 at a price of $105 he/she can be certain that the interest payable is $10 per bond equal to a return of 10/105, or 9.5% gross. This interest is owed annually (usually in two instalments) until the date of maturity of the bond when the bond is redeemed for the nominal value of $100. The return earned on bonds will in general though not always be higher than that available through interest bearing deposit accounts. Ordinary shares present a greatly riskier form of investment particularly for private individuals who may acquire high charges for the purchase and sale of shares. The price of ordinary shares differs daily depending on factors within the market in general and as well specific to the company. An investor may perhaps earn a return via dividends and/or capital gains. The amount of dividends receivable is dependent amongst other things upon the profits of the company and hence is not predictable with certainty.
Individual share prices are absolutely not predictable with any level of certainty. As a result investment in ordinary shares is relatively risky but may perhaps offer good returns which historically have been shown on average to be higher than the returns on bonds. The purchase of derivatives such like futures or options as a way of investing in traded securities may be highly risky unless they are covered trades. The potentially extremely high returns from such investments reflect the associated high risk. In finale when comparing the different traded investments it is necessary that the composition of the investment portfolio matches both the liquidity and risk needs of each individual investor.