In general, corporate securities are securities issued by companies in order to finance their activities. They can be divided into capital, debt and derivative ones.
Shares are capital securities that materialize the right of ownership upon a differentiated part of the company. Shares give the following major rights: the right of voting at the General Meeting of shareholders, the right to receive dividends, as well as the right to liquidation share. Except this, every shareholder has the right to acquire a certain number of shares (proportional to the number of his/her shares in the company) if the capital of the company is raised. This is accompanied by the temporary existence of derivative securities – the so-called rights. The return on an investment in shares is composed of the dividends received and the difference between the purchase price and the sale price (capital gain). The risk of investing in shares is bigger than the one of investing in bonds but the expected return is also significantly higher. On an efficient and well developed market shares are highly volatile and reflect the whole available information concerning the activity of the issuing company and this is a prerequisite that relative more speculative players use shares as a major instrument.
Corporate bonds are securities that materialize investors’ receivables from the issuer of the securities in connection to a loan and that determine their character of debt securities. The return is composed of the coupon payments and the difference between the purchase price and the sale price. Quite often the principal and/or the coupon payments of bonds are secured by another asset (secured bonds). The corporate bonds are a relatively lower risk investment with preliminary fixed or floating coupon. In fact, the bondholder is a creditor to the issuing company. His receivables related to the principal and coupon payments are a senior obligation in comparison with those of shareholders. Bonds are securities with relatively low volatility and changes in their prices depend mostly on their maturity, the size of coupon payments and the interest rates. This kind of instruments is suitable for conservative investors looking for an alternative to bank deposits and government bonds.
Securities issued by private (non-public) companies
Except investing in public companies and issues, there are attractive opportunities to make a direct investment in the capital or debt of a private company. A lot of industry sectors now undergo deep restructuring, others are emerging. This gives investors and entrepreneurs the chance to take advantage of the potential growth of the Bulgarian economy. The liquidity risk is the additional risk that these securities have in comparison with listed securities because they are not traded on the Stock Exchange.
Derivative securities (derivatives)
Derivatives are securities that derive their value from another asset (commodities, securities, etc.) Derivatives are rights, warrants, options, future contracts and a large number of other securities.
MORTGAGE AND MUNICIPAL BONDS
As a matter of fact they do not differ from corporate bonds mortgage bonds are corporate securities. The difference is that they are issued by banks or municipalities and as a whole are considered to be less risky. Mortgage bonds are additionally secured securities.
GOVERNMENT BONDS AND GOVERNMENT DEBT
Government bonds are securities issued by the Ministry of Finance as a representative of the state and they materialize government debt. Bulgarian or foreign individuals and companies can be holders of government bonds. Government bonds in circulation are separate issues that possess unique features such as:
- the number of the issue – a letter-and-number code that identifies the issue;
- date of the issue – the day of issue and from which the maturity date is calculated;
- maturity – the day on which the face value of the issue is paid and the liability of the state towards the holders of the bonds is terminated;
- face value – the value that is paid to the holders of the government bonds on the maturity date;
- interest rate – the interest rate charged on the face value in order to calculate the value of the interest due. They are often referred to as interest coupons.
It could be said that the investments in government bonds are:
- very safe – the payment of the face value on the maturity date and the interest coupons is guaranteed by the state;
- highly liquid – the volumes of government bond issues are very large and there is a developed secondary market for them where investors could sell the government bonds they possess before the maturity date with transaction costs amounting almost to null.
According to their maturity government bonds could be classified as:
- short-term – issued with maturity of less than a year;
- middle-term – with a maturity between one and five years;
- long-term – with a maturity longer than five years.
According to the kind of return of the government bonds they could be classified as:
- interest-bearing – they are issued at a price equal or higher than their face value and an interest;
- discount bonds – they are issued at a price below face value. Their return is the difference between the price at which the bonds are bought and the face value payable at the maturity date;
- discount interest-bearing bonds – they are issued at a price below face value and an interest. Their return is composed of the discount from the face value and the interest.
The so-called ZUNK bonds are in circulation as well. As a matter of fact they are government bonds issued in accordance with the Law for Settling Non-Serviced Credits, granted until 31st December 1990. ZUNKs are government bonds and possess all their features.
Compensatory instruments are issued by the corresponding representatives of the Bulgarian state (state departments, district administrations and land commissions) in order to compensate persons or their legatees whose estates, buildings or agricultural land are taken by the state or alienated. Compensatory instruments are nominal – issued to a concrete person – and (except compensatory receipts from converted housing deposits) are transferable without any limitations. They can be used as a resource for paying in privatization deals and with them shares of the capital of the privatized company could be acquired. After they were listed on the stock exchange, compensatory instruments became not only a resource for paying in certain privatization deals but also an actively traded instrument with high liquidity. The return from investments in compensatory instruments has a highly speculative nature and investors need to have in mind that they are not securities (although they are traded as such), they have a temporary status and they are not secured by real assets.