What are Fixed Income Securities?

Jim B.

Fixed income securities are investment opportunities that promise investors the chance for regular returns on their initial investments of capital. These securities are valuable to investors because, unlike stocks, the returns are generally protected from the volatility of the stock market. Of all possible fixed income securities, bonds, which are issued to investors who receive interest payments and the eventual repayment of their capital commitments, are the most popular. It should be noted that bonds and other fixed income instruments are not free from risk, as they depend on the stability of the companies offering them.

Businessman with a briefcase
Businessman with a briefcase

If an investor places money in the stock market, he is generally buying ownership of some company in the hopes that the value of that company will rise. When that doesn't occur, the investor runs the risk of losing some or all of his initial investment, and he is essentially at the mercy of how other investors react to the stock. One way for investors to feel a bit safer is through fixed income securities, which, as their name indicates, promise regular payments.

When investors talk about fixed income securities, they are generally referring to bonds. If an investor buys a bond, she is essentially loaning her money to the institution issuing the loan. The issuer uses the funds raised from bonds as a way of raising money, but she also makes a promise to repay the loan at the end of the bond term. In addition, the issuer also promises to make regular interest payments at a rate determined at the beginning of the arrangement.

Investors should realize that even fixed income securities carry the risk of the institutions issuing them defaulting on repayment obligations. The interest rate offered by the issuer usually reflects the amount of risk involved. For example, bonds offered by governments are usually safe but offer interest payments that are relatively low. On the other hand, some corporations lure investors by promising high interest returns on their bonds, which indicates that the corporations could be unstable and may not be able to pay investors back.

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While they are the most popular, bonds are not the only examples of fixed income securities available to investors. Basically, any type of investment that promises the investor payments regardless of any market pressure could be considered fixed income. One example of this is preferred stock, which is offered by companies to certain investors. Investors with preferred stock receive regular payments from companies known as dividends.

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