The products in the financial system have certain basic characteristics which provide an indication of how they operate and are used as investment instruments.
Stock: A company can issue ordinary (common) shares and preference shares as share capital. Preference shares carry a fixed dividend and the amount due to preferred stockholders (par value) in the case of liquidation is repayable before any payments to ordinary stockholders.
Dividend on ordinary shares is characterized by uncertainty. It is typically high when a company performs well and low (or zero) when performance is poor. Because of the potential for high returns in good times (among other reasons), many investors opt for ordinary shares.
These shares may be purchased at the initial public offering by a company, or traded between stockholders on the secondary market (through stock brokers).
Bond: As a debt instrument, a bond may be issued by the government or a corporate entity. Generally, a bond entails a specified fixed or variable rate of interest (coupon); an indication of the timelines for interest payments and the maturity date of the contract.
The coupon rate is the interest rate that will be applied to the contracted amount of the bond (principal) to determine the amount to be paid to the bondholder on the stipulated timelines for periodic payments.
The maturity date is the date that the issuer agreed to repay the bond principal to the bondholder.
Mutual Fund/ Unit Trust: Shares or units are sold to any number of persons interested in purchasing into these pooled investments. Mutual funds and Unit trusts are open-ended investments meaning that there is no limit to the number of shares that can be purchased and investors may buy more shares at any time, thereby adding to their initial investment.
The number of shares/ unit purchased determines the proportion of the income/ earnings that each shareholder gains. Of the entire net income earned by the Fund, each shareholder gains a direct proportion of the shares held to total shares in the Fund. Each shareholder also gains when the price per share/ unit (at sale) is higher that the price at purchase.
Mutual funds are denominated in foreign currency, typically the USD or Canadian dollar.
Unit trusts are denominated in Jamaica dollar.
Investment-Linked Insurance: An insurance policy with an option for investment, is one in which a guaranteed life insurance coverage is combined with an opportunity for the policyholder to gain income from investments (by the insurer) in securities.
The investment component provides no guarantees but the policyholder stands to benefit from any gains in the performance of the security(ies) – example equity.
The total insurance premium therefore includes a specified portion for insurance (usually life insurance) and a portion for investment.