Question

2. List and explain investors’ motivation for investing in stocks, bonds, preferred shares, and convertibles, based on the characteristics of each of these financial vehicles, from the risk and income perspective of investors.

Answer 1

There are different motivations for investors to invest in different types of assets class like equities, bonds, preferred shares, and convertibles. each of these has different kind of characteristics and return associated with them.

Investment in stocks is highly risky and highly rewarding. It is a method of investment in which investors prefer to buy the ownership of the respective company by purchasing the shares in the market. they can gain through appreciation in the value of the stock for distribution of dividend or any kind of share buyback by the company.

Investment in bonds is considered to be safe as they are associated with the debt class. Investment in bonds will give consistent-return in the form of the interest which are paid by the company and this type of bonds are less risky as even at the time of insolvency of the company, these bonds have priorities in payments so bonds are considered to be safe.

investment in preferred stock is a mix of characteristics of both equity as well as bonds. Investment in preferred stock earn through payment in form of dividend but those dividend are highly preferable than common shares. They does not have any right to vote in the board meeting of the company but they are more secure than the common shares because they will be paid first in the event of liquidation of the company.

Investment in convertibles are preferred as a option which are adopted by the safe investor who would like to own the debt of the company with an intention of owning the equity in the company at a future period of time. They want convert the bonds at a future point of time when it is yielding benefits in-form of conversion into shares.

So these type of investments are diversified and have different kind of risk exposures associated with them so an investor must analyse his risk appetite before investing into them.