Hybrid investing

Lyssa Beyer

In the past few columns we discussed stocks, bonds, mutual funds and the importance of diversification. This column will focus on what I would refer to as the hybrids of these securities. These hybrids are like crossbreed securities. These securities are more difficult to play and should be used after you have an understanding of the basic securities. The following is a rough outline of the security. Each security should be examined more closely – do your homework – if you are interested in the investment.

Exchange Traded Funds (ETF): These securities act like a mutual fund but trade like a stock. They are typically targeted to indices (NASDAQ, Dow Industrials, S & P 500, etc.) or specialized areas (wind, water, gold).
Benefit: Very liquid and fees are lower than mutual funds.

Preferred Stock: This will trade like a stock but acts as bond. These will offer a higher dividend but will not appreciate like stock. These typically have targeted dates to be redeemed by the company.
Benefit: Trade on the open market with dividend payments that are predictable.

Closed End Funds (CEF): These are like mutual funds except are only sold through an IPO with a set number of shares. After the IPO, investors must sell to other buyers in the market. These will trade above or below the value of the Net Asset Value (NAV) depending on the demand of the market.
Benefit: Dividend payments are above average and predictable. Often discounted to the value in the marketplace.

Real-Estate Trust (REIT): These are stocks invested in real estate like storage units, apartments, malls, office buildings, etc. Dividend payments are typically the attraction of this security but appreciation is slow.
Benefit: 95 percent of profits must be paid to investors.

Options: This is a contract for the right to purchase or sell at a specific price during a specific time period for a fraction of the current price. For example, hypothetically speaking, if you think a $25 stock is going to appreciate within the next few weeks, you could purchase the right to buy at $25 for less than a dollar. If the stock moves above $25 before the contract expiration date you can exercise your right to purchase the security for $25 even if the stock is at $100.
Benefit: The right to purchase an appreciating security for pennies on the dollar.

Successful investors will find a niche market to invest. Finding a niche requires deep knowledge and behavior in a particular market. This is done with through experience and homework.
All of these hybrids have caveats that are too numerous to explain in a single column. These investments can add significant value to any portfolio, but should not be the only investments in the portfolio.

Jason Windsor is a senior economics major and columnist for The Spectator. This column appears bimonthly.