The most common type of fixed-income security is a bond, but there are other types as well, including certificates of deposit (CDs), which pay regular interest, and preferred stocks – where payments are made in the form of fixed dividends. With all fixed-income securities, you know exactly how much income you’ll earn from the security. (See also: What is the Difference Between Preferred Stock and Common Stock?)
Disadvantages of Fixed-income Securities
Of course, all this certainty comes at a price: Fixed-income securities have a lower rate of return than many other investments, and, as a result, tend to be especially popular among risk-adverse investors. Still, fixed-income securities can be an important component in any investor’s portfolio, whether they are seeking safety, capital appreciation, tax advantages or income.
In many ways, fixed income is more complicated to trade than equities due to the great number of issues outstanding and the lack of transparency in the market. Still, if you have process in place for monitoring the market, screening the available universe of issues, determining fair value for a security and executing a trade, it helps ensure you’re buying and selling securities in a manner that helps you reach your investment goals. (To learn more about bonds, see: Advanced Bond Concepts.)
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