Types of Securities for Private Investors

Types of Securities for Private Investors: A Comprehensive Guide to Selection

Introduction

Today, private investors can choose from a multitude of financial instruments: stocks, bonds, funds, derivatives, and structured products. Each type of security combines unique characteristics of risk, return, and liquidity. A deep understanding of these features helps to build a portfolio that aligns with investment goals, time horizons, and risk tolerance. In this guide, we will explore the types of securities, analysis methods, real-life examples, and provide templates for self-selection of instruments in global markets.

When analyzing, it is essential to consider macroeconomic trends, technological changes, and geopolitical risks to adapt strategies to the rapidly changing world of investments.

Stocks

Common vs Preferred

Common stocks provide voting rights at shareholder meetings and variable dividend yields. Preferred stocks typically do not come with voting rights but offer fixed dividends and priority in capital distribution during liquidation.

For example, companies in the oil and gas sector often issue preferred shares with dividend yields of up to 10%, attracting investors seeking stable income.

Income Mechanisms

A shareholder's income consists of two components:

• Dividends: regular payments from net profits. Example: Coca-Cola has paid dividends quarterly for over 60 years.
• Capital Gains: the increase in the market price of the stock. Example: Apple increased its stock price more than 20 times over the last decade.

Buying and Trading

Stocks are purchased through brokerage accounts on stock exchanges. The minimum lot and commission rates depend on the broker and the exchange. For foreign stocks, American Depositary Receipts (ADR, GDR) are used, traded on local markets. When selecting, pay attention to liquidity, trading volume, and the spread.

Case Study: IPO and Long-Term Growth

In 2020-2021, investors who bought shares of Airbnb and Snowflake at their IPOs saw significant capital appreciation due to the strong recovery in post-pandemic demand for services and the growth of digital platforms.

Bonds

Government vs Corporate

Government bonds (OFZ, Treasuries) are considered instruments with minimal credit risk, offering low yields and high liquidity. Corporate bonds provide higher coupon rates but carry the risk of issuer default, assessed by rating agencies.

For instance, Russian OFZ bonds with a 7% coupon and a 3-year term are popular among conservative investors, while Gazprom bonds with a 9% coupon attract those willing to accept moderate credit risk.

Coupon and Yield to Maturity

The coupon is a fixed percentage of the nominal value, paid regularly. Yield to maturity (YTM) accounts for the current market price, coupons, and nominal value, reflecting the real return if held to maturity.

Terms and Liquidity

Bonds are issued for terms ranging from 1 to 30 years. Short-term bonds (1-3 years) are less susceptible to interest rate fluctuations, while long-term bonds (10+ years) offer higher coupons but greater price volatility. Liquidity is determined by trading volume and market demand for specific issuances.

Laddering Strategy

A laddered bond portfolio mitigates interest rate risk and provides a regular cash flow for reinvestment at current rates.

Funds: ETFs and Mutual Funds

ETFs

ETFs (Exchange-Traded Funds) are exchange-traded funds that replicate the composition of indices. Their shares are traded like stocks, with low fees (0.1-0.5%) and high liquidity. They are suitable for passive investing and instant diversification.

Mutual Funds

Mutual funds are managed by professional managers. Open-end mutual funds allow for daily purchases and sales of shares, while closed-end funds can only be traded at maturity. Fees are higher (1-3%), but active strategies are available, including credit funds, infrastructure, and alternative assets.

Comparison of ETFs and Mutual Funds

Derivatives and Structured Products

Futures

A futures contract obligates the buyer to purchase or the seller to sell an asset at a predetermined price in the future. It is used for hedging and speculation. Trading requires collateral (margin), and risks can exceed the invested amount.

Options

An option grants the right (but not the obligation) to buy (call) or sell (put) an asset at the strike price before or on the expiration date. They are used to protect positions and create complex strategies with limited losses equal to the premium paid.

Structured Products

Instruments that combine bonds and options. They provide capital protection and additional income when certain market conditions occur (e.g., index growth, currency fluctuations).

Risks and Returns

Types of Risks

• Market Risk: price fluctuations in the market.
• Credit Risk: default by the bond issuer.
• Liquidity Risk: inability to quickly sell an asset without losses.
• Currency Risk: changes in exchange rates when investing in foreign securities.
• Systemic Risk: global crises affecting all markets.

Return Levels

• Stocks: dividends 2-5% and capital gains.
• Bonds: coupon 3-6% for government bonds, up to 12% for corporate.
• ETFs/Mutual Funds: similar to indices, 5-15%.
• Derivatives: potentially unlimited returns, but with high risk.

Taxes and Commissions

Taxes

Dividends are taxed at 13% for residents of the Russian Federation and 15% for non-residents. The coupon of bonds is taxed at 13%, but is exempt on Individual Investment Accounts (IIS). Profit from the sale of securities is taxed at 13% if there is no IIS.

Broker Commissions

Transaction commissions range from 0.02-0.3% of turnover and may include minimum commissions. There are plans with subscription fees or "no transaction" for infrequent operations. Additionally, consider exchange fees, depository services, and currency conversion charges.

Investment Strategies and Diversification

Balanced Portfolio

Allocation: 40% stocks, 30% bonds, 20% funds, 10% cash. This combination reduces volatility while maintaining growth potential.

Aggressive vs Conservative

Aggressive: 70% stocks, 20% funds, 10% bonds — high risk and return.
Conservative: 40% bonds, 30% funds, 20% stocks, 10% cash — low volatility, capital preservation.

ESG Investing

Integrating environmental, social, and governance criteria helps mitigate non-financial risks and support sustainable development. ESG funds and "green" bonds are becoming increasingly popular among investors.

Case Study: Green Bonds

Sberbank's "green" bonds worth 50 billion RUB with a 7% coupon financed energy efficiency and waste recycling projects, providing stable income for investors and supporting environmental initiatives.

Conclusion

The diversity of securities offers opportunities for implementing various investment strategies: stocks for growth, bonds for income, funds for diversification, and derivatives for advanced approaches. Analyzing risks, yields, taxes and commissions, as well as prudent asset allocation and consideration of ESG factors, will create a resilient portfolio to achieve financial goals.

Use this guide as a starting point, adapting the selection of tools to personal objectives and global market trends.