In general, before you start investing, you should first be able to identify your needs, so that you are able to make better informed decisions.
Nowadays, there is a wide range of products for consumers to choose from. It is important that you take time to choose something that is suitable for you. Think about diversification - will the product complement, supplement or replace what you have?
What should you, as an investor, know about bonds? What are the risks? What should you do when a bond issuer defaults?
What are bonds?
A bond is a debt security. It is a form of borrowing. Governments and companies issue bonds to raise funds from investors willing to lend them money for a period of time. Investors, including retail investors, buy bonds to earn interest during the life of the bond. Bonds can form part of investors’ investment portfolios.
Most bonds pay a regular stream of interest income throughout their life, also known as coupon. Coupon rates are typically expressed as a percentage of the principal amount, which is also known as the “face” or “par” value. Upon maturity, bonds are redeemed at the face or par value.
If you invest in a unit trust or fund, your money is pooled with money from other investors and invested in a portfolio of assets according to the fund’s stated investment objective and investment approach.
Shares are issued by companies to raise capital or financing from investors. When you buy a company’s shares, you become a shareholder of the company. Shareholders are usually entitled to a share of any dividends that are declared and paid.
A traded life policy (“TLP”) is a life policy that has been sold by the original policy owner to an investor other than the insurer itself. TLPs are also commonly known as ‘second-hand’ life policies.
Exchange traded funds (ETFs) are open-ended investment funds listed and traded on a stock exchange. Your money is pooled with money from other investors and invested according to the ETF’s stated investment objective.
A structured deposit combines a deposit with an investment product. The return on a structured deposit depends on the performance of an underlying financial asset, product or benchmark.
A CFD allows you to speculate on future market movements of the underlying asset, without actually owning or taking physical delivery of the underlying asset.
Investment-linked insurance policies (ILPs) have both life insurance and investment components. Your premiums are used to pay for units in investment–linked fund(s) of your choice. Some of the units you buy are then sold to pay for insurance and other charges, while the rest remain invested.
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During the dot-com bubble of the 1990s, the biggest gains came after companies went public. These days, far more wealth is being created as private companies raise financing from venture-capital firms, pushing valuations of those companies higher and higher. At least 78 such companies are now worth at least $1 billion a piece, up from 49 a year ago. As a result, investors are clamoring to get in on the action right now.
Uber, Snapchat and Airbnb are among the many privately held companies that set tight limits on selling shares. Few companies make it easy for outsiders to buy stock. Well-connected investors sometimes get access to special funds created by firms that get privately held shares directly from companies.
When a company embarks on an IPO (which stands for initial public offering) it goes public on a stock exchange. This can also be known as floating, flotation, or just ‘going public’.
IPOs are one of many ways in which companies can seek to raise capital, with other popular options including finding major investors, crowdfunding or using retained earnings.
A successful IPO can raise huge amounts of capital: as Alibaba did in 2014 when it floated on the New York Stock Exchange and rose over $20 billion. However, IPOs also incur considerable costs and require the company involved to make itself fit for the public eye and its exchange’s compliance rules.
This all makes any float a costly consideration for a business. For traders, though, a float can be a great way of getting a share of a company the moment it hits the stock market.
When private companies first decide to sell securities to the general public, it's called an initial public offering. Before the IPO, the company attracts investors with pre-IPO shares. Generally, the company sells these shares to private equity firms or hedge funds as well as other institutions, particularly if the stock is likely to be in high demand. Although buying the pre-IPO shares can get you in on the ground floor of a lucrative investment.
Usually companies participating in IPOs are young, small companies trying to raise capital to grow their businesses. However, sometimes larger and more established private companies also offer IPOs so the public can buy and sell their stock. Companies often work with an investment bank or underwriting firm that specializes in IPOs. The underwriter helps them figure out the types of stock to offer, the optimum time to go to the market, and the initial offering price
Before the IPO, the company issuing the stock for the IPO may offer pre-IPO shares to private investors. Primary buyers, such as hedge funds, have the resources to buy large stakes in the company and commit to hold the shares as a long-term investment.
As the day for the IPO gets closer, the company and the underwriter determine the initial price of the stock shares. They base the price on the company, the expected demand for the shares, and current market conditions. This price almost always exceeds the pre-IPO price. Once the shares are listed on the stock exchange and trade publicly, the value is determined by supply and demand for the offering. The SEC notes how extremely high demand for ‘hot’ stocks can outstrip the supply, causing prices to rise dramatically.