What Are the Different Types of Securities?

Types of Securities

When people talk about investing, many people think of common stock, which are shares of a company. Other products on exchanges trade like a stock, giving investors exposure in different ways, depending on their goals and risk tolerance. 

  • Common Stock
  • Preferred Stock
  • Exchange Traded Funds (ETFs)
  • Exchange Traded Notes (ETNs)
  • Real Estate Investment Trusts (REITs)
  • American Depository Receipts (ADRs)
  • Master Limited Partnerships (MLPs)

Common Stock

Common stock gives investors a partial ownership stake in a company, also called equity. It represents a fractional claim of the company’s assets and earnings, but not all shares are equal. For example, if a company goes through bankruptcy, common stockholders are usually one of the last ones to be paid out, which sometimes means they get nothing.

When a company issues common stock, there can be different share classes. Each class of common stock is differentiated by a letter, such as Class A, Class B, Class C, and so forth. Each share class may be priced differently, since they give shareholders specific company rights, like voting during shareholder meetings, or even represent a fraction of a different class of shares.

Investors who own common stocks have the potential to make money if the shares increase in value or receive income if the company pays dividends, passing earnings to shareholders. Usually, companies that pay dividends are very established, with steady profits. Newer, growing companies are less likely to do so.

Depending on the company, investors may view common stock as a speculative asset. For example, they might buy stock in a company trying to develop a breakthrough technology, believing their share price will increase in the future if the company succeeds. Other investors may wish to purchase common stock for the income received from dividends. Some companies distribute a portion of their profits to common shareholders through dividends on a fixed distribution schedule. It’s important to keep in mind that a company might adjust the frequency or amount of dividend payments, and future dividend payments are not guaranteed to common shareholders.

But owning stocks does come with risk. Even stable stocks can see tough years due to downturns in an industry or the economy. While some investors look to buy the dip, or purchase stocks after a downturn, a stock drop never guarantees the stock will later increase in price. The stock may keep falling, since there might be issues “beneath the surface,” like imminent bankruptcy.

Exchange-listed common stocks can be the underlying assets for options markets, and they’re often available for trading. At tastytrade, we only support U.S. exchange-listed stocks. We don’t offer "penny stocks," also called over-the-counter bulletin board (OTCBB) stocks or pink sheets.

Learn more about trading and investing in stocks

Preferred Stock

Preferred shareholders get preferential treatment over common shareholders when it comes to a company's income and assets. Preferred shareholders are paid dividends before common shareholders, often at a fixed rate, and preferred shares generally don’t come with voting rights. Some preferred shares are callable. This means the issuing company can redeem preferred stock for common stock or cash.

Due to its fixed dividend rate, preferred stock has characteristics of both equity and debt securities. That means it may not experience price changes as large as common stock. But that doesn’t mean preferred stocks can’t fall in price.

When a company goes through bankruptcy, preferred stockholders are ahead of common stockholders with recouping losses via any asset liquidation, but there isn’t a guarantee that the company will have sufficient assets to pay. Not all companies may choose to issue preferred shares. The specific characteristics of preferred stocks will vary from company to company, so investors should do research before buying them.

Exchange Traded Funds (ETFs)

Shares in Exchange Traded Funds (ETFs) give investors access to a "basket" of stocks or assets. Stock-based ETFs can track an index, like the S&P 500 or Dow Jones Industrial Average. Other ETFs track a specific sector, industry, or even stocks in other countries. Some ETFs track non-stock assets like bonds or precious metals, and some ETFs can be actively or passively managed.

ETFs are traded on the stock exchange, and their prices can change during the day, just like stocks. An index ETF gives investors proportional, fractional ownership of every stock in that fund. Likewise, shares of a bond fund give proportional, fractional ownership of every bond in that fund. If the aggregate value of the underlying stocks, bonds, or other assets changes, so does the value of the ETF.

An ETF offers investors diversification since their capital gets dispersed across all the assets in the fund. By owning shares of an ETF, investors get a more efficient way of gaining exposure, without needing to individually buy every asset the fund holds. That way investors can benefit from the collective performance of a fund and could even get dividend income from it.

The dividends of a stock-based ETF comprise the dividends of all the stocks in the fund. A bond fund's dividends consist of the coupon payments of the individual bonds within that fund. Each dividend payment can fluctuate due to changes in the ETF's holdings or composition.

While it may reduce some risks through diversification, the investor still gets exposed to the overall risk of the ETF’s tracked index or assets. That’s why it’s important to analyze the ETF to see its composition and ensure it matches your investment objectives. Some ETFs are very balanced in exposure, while others are top-heavy, with lots of exposure spread out across a few popular names.

Each ETF has a corresponding expense ratio in exchange for managing the fund, representing the annual "cost" of holding the ETF. While this expense ratio isn’t paid directly, it impacts the fund’s overall return in any given year.

Like common stocks, ETFs are often underlying assets for options markets. Most large ETFs have options available to trade. Whatever you’re looking for, there’s probably an ETF for it, and you can trade it in all account types at tastytrade.

Exchange Traded Notes (ETNs)

Exchange Traded Notes (ETNs) are designed to track the performance of a specific asset, index, or other benchmarks. Unlike an ETF, an ETN is a debt obligation of the issuer. This means that the issuer of the ETN doesn’t hold the assets that the ETN is designed to track and purchasing an ETN won’t give you an ownership stake in the asset. If the issuer has a downgrade in its credit rating or defaults, an investor may incur losses, even if the underlying asset hasn’t dropped in price.

Since an ETN is a debt instrument, at maturity or if called early, an ETN will pay a return based on the index it tracks, minus any fees charged by the issuer. ETNs can expose investors to various asset classes, including commodities, currencies, stocks, bonds, and alternative investments like futures. But ETNs aren’t equity products like ETFs because the shares represent a portion of unsecured debt with the issuing institution. Like with any debt product, ETNs have the risk of price fluctuation and issuer default risk. Since ETNs represent a portion of a note that represents a specific asset class, like futures, they can give investors access to an asset that they might otherwise not be able to trade.

A unique characteristic of an ETN is that it can experience “drag.” Drag means the fund’s gradual depreciation or underperformance because of carrying costs. In other words, it costs money for the fund to carry the debt. Some ETNs face daily rebalancing, which means the ETN must buy or sell assets in the fund to maintain the fund composition. Thus, transaction costs from buying or selling those assets may weigh down its overall performance.

Just like stocks and ETFs, some ETNs offer an options market as well.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are a type of company that owns, invests in, or funds income-producing real estate. There are many different types of REITs, so it’s important to research its composition and revenue model before investing in it.

REITs can be traded on exchanges like shares of common stock. Like stocks, REITs owners can benefit if the price of the REIT increases or through dividends. REITs usually focus on a specific type of real estate, like shopping malls, hotels, senior living facilities, prisons, apartments, and much more. Any establishment you walk into could be owned by a REIT.

Also, REITs that directly hold real estate must pay out 90% of their income through dividends and can generate income within a portfolio on top of potential share price appreciation.

However, not all REITs invest directly in real estate. Mortgage REITs own portfolios of mortgages and mortgage-backed securities. Hybrid REITs have both property and mortgage assets in a single REIT. There are also ETFs that hold a basket of REITs.

REITs carry risks like any investment. Falling property values, declining occupancy rates, high interest rates, or lower rent payments can all impact the prices of REITs and their dividend payments.

Some REITs also have options markets available to trade. REITS are available for all account types at tastytrade, allowing you access to portfolios of real estate assets.

American Depositary Receipts (ADRs)

American Depositary Receipts (ADRs) are shares of a foreign company traded on U.S. stock exchanges or over-the-counter. They allow investors to invest in international companies without trading on foreign exchanges or in foreign currencies. ADRs can give investors international exposure to diversify their portfolios.  

As the “DR” in the name suggests, a depositary receipt means a portion of a company held at a U.S. bank. They’re traded like American companies since the shares are listed on U.S.-based markets. However, ADRs may be subject to a periodic fee charged by the depository bank, called “ADR Fees.”  

ADRs have risks just like any investment. They include company-specific risks, but also currency, local inflation, and geopolitical risks. The value of the ADR can fluctuate with foreign exchange rates and broader volatility in the ADR's home country. 

ADRs trade like common stock and some have option markets. ADRs are available to trade in all account types at tastytrade.

Master Limited Partnerships (MLPs)

Master Limited Partnerships (MLP) allow investors to invest in real estate ventures, energy projects, and infrastructure. For example, costly energy-related projects, like pipelines, often form an MLP to raise funds from investors.  

While MLPs trade like shares on an exchange, investors who own "shares" are technically not shareholders. Instead, the "shares" of an MLP are called units, and owners are considered unitholders. As a result, all investors, including international investors, that trade or hold units are subject to receive an IRS Form K-1, reflecting their ownership in the MLP. 

MLPs usually offer a large dividend, but as with any investment, the value of MLP units can change based on the venture’s performance, and there’s always the risk of dividends getting reduced or eliminated. 

Like the other securities listed here, some MLPs also offer options. 

Due to changes to section 1446(f) Internal Revenue Code (IRC), some MLPs are not available for trading with international customers. Please visit the tastytrade Help Center to learn more.

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