What are hybrid securities?
What are hybrid securities?
Points to know
- Preferred stocks have a face value and pay interest, but they're traded on an exchange.
- Exchange-traded notes have a maturity date, but their value fluctuates based on a specified stock index.
- Convertible bonds can be changed into stocks if it's beneficial for the investor.
- For most people, a portfolio of stocks and bonds provides plenty of diversification. Sophisticated investors may want to consider strategies that use hybrid investments.
Preferred stocks
Like bonds, preferred stocks (also called preferred securities) have a face value and pay income at specified intervals. They're also susceptible to interest rate risk (though less so than regular bonds).
However, as with common stocks, preferred stocks are traded on exchanges like the New York Stock Exchange. The values of preferred stocks will fluctuate with the market, although not to the same extent as common stocks.
Preferred stock owners have no ownership or voting rights. If a company issuing a preferred stock is in financial trouble, the holders of the preferred stocks will be paid after bondholders but before common stockholders. Thus, their risk is somewhere in between common stocks and bonds.
Exchange-traded notes
Exchange-traded notes (ETNs) also have characteristics of both stocks and bonds.
Like stocks, they're unsecured (meaning they're not backed by collateral). In addition, holders of ETNs will be paid behind bondholders and preferred stock holders. ETNs are traded on stock exchanges and their values are based on the performance of a specified market index.
Like bonds, however, ETNs have a maturity date (although they don't pay interest), at which time the holder will be paid the current principal amount.
Convertible bonds
Convertible bonds (also called convertible securities) are corporate bonds that can be converted into stocks if the buyer chooses. Because of this added flexibility, convertible bonds generally offer lower interest rates than similar nonconvertible corporate bonds.
The risk and potential return for convertible bonds is somewhere between common stocks and regular bonds.
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