Investments are highly liquid and marketable assets held by a business firm for the accretion of wealth by means of earning royalties, interest, dividends, rental and for capital appreciation purposes or for other future economic benefits that will be yield from such investment.
In a business sense, investments are assets which do not fall within the scope of the normal operating activities of the business firm. It occupies only a secondary relationship to the direct revenue producing schemes of the company.
There are numerous kinds of investments examples of which are equity instruments such as ordinary shares and preference shares and debt securities such as bonds securities and treasury bills.
Equity securities from the name itself are investment securities which represent ownership in a particular company/corporation while debt securities are investment that represents a creditor-debtor relationship. Both equity and debt securities offer specific advantage and disadvantages.
The Advantages and Disadvantages of Ordinary Shares/Preference Shares
Ordinary shares are residual claim to a corporation. The owner’s interest lies within what is left to the corporation after satisfying the claims of the creditors and preference share holders. The residual nature of ordinary shares can be in itself an advantage or disadvantage depending on the performance of the company.
Ordinary shares can wildly increase or decrease in value. A distinct advantage of ordinary shares is that it allows the holder to participate in the management affairs of the corporation. Ordinary shares are entitled to a voting right in key business and decision making policies of the corporation.
Preference shares on the other hand, are shares which represents priority claims over the corporation’s assets and earnings. It carries certain privileges such as convertibility.
However, preference shares earnings are limited to the rate of their interest that usually ranges from 5-12 percent of their face value. Preference shares also do not have voting rights.
The Advantages and Disadvantages of Bond Securities
Given these tough times of economic recession, bond securities are seen as a sound investment mainly because of its long-term status. Bonds are essentially a long-term obligation of the issuing company. It has fixed interest that further minimizes interest rate risk. There are certain bonds that are secured by mortgages on real property, sinking fund covenants and collateral.
Still, bonds can be affected by the bond market thus, decreasing its value.
The Advantages and Disadvantages of Treasury Bills
Treasury bills are highly liquid investments issued on a short-term basis. Treasury bills are marketed constantly and can be easier transferred from one person to another. Its negotiability often serves as both a curse and a gift.
Its hassle-free negotiability makes it easier to be converted to cash and other liquid cash equivalents but it can make the security more vulnerable to short-term price fluctuations.