Stocks, Bonds, Asset-Backed Securities — How to Choose the Right One?

In brief:

• Securities are financial instruments that confirm certain ownership or claim rights. The most popular types of securities in finance are stocks, bonds, asset-backed securities and investment funds.

• Stocks provide ownership rights in a company and a potentially higher return, but with greater risk and price volatility.

• Bonds are a debt instrument with more stable income and lower volatility, but a lower potential return.

• Asset-backed securities (ABS) are based on the cash flows of loans or other assets, taking a middle position between safety and yield.

• The choice of suitable security depends on the investor's goals, risk tolerance and investment term.

In the financial world we often hear terms such as stocks, bonds, funds or asset-backed securities. However, for many potential private investors these concepts seem too technical and complicated. As a result, people either give up on the idea of investing altogether or invest without really understanding how the specific financial instrument works and what risks are associated with it.

Different types of investment securities operate on different principles. Some investment types offer the opportunity to earn from a company's growth, others provide fixed interest income, while still others are based on the cash flows of loans or other assets. Understanding the difference between stocks bonds and securities is one of the foundations of thoughtful investing.

What are securities

Put simply, securities are financial instruments that confirm certain ownership or claim rights. They can provide rights to a portion of a company, interest income or cash flow from specific assets.

The securities market brings investors together with companies, governments and other organisations that need financing. Investors, in turn, gain the opportunity to earn from interest, dividends or appreciation in value.

The most popular types of financial instruments are:

• Stocks.

• Bonds.

• Asset-backed securities.

• Investment funds.

Each of these has a different risk level, return potential and operating principle.

Stocks — An investment in a company's growth

Stocks are one of the most well-known types of investments. By purchasing stocks, the investor becomes a co-owner of the company.

This means the investor gains the opportunity to:

• Profit from an increase in the share price — if the share price rises in the market, the investor can sell the shares for more than they paid.

• Take part in shareholder votes.

• Receive dividends — if the company has sufficient profit, management and shareholders decide to distribute part of the profit as dividends, and the company's strategy provides for regular payouts.

Some companies pay dividends regularly, for example quarterly or annually, while others reinvest profits in growth and do not pay dividends at all. Investors should bear in mind that even companies with a long dividend history can reduce or stop payments during periods of economic difficulty.

Main risks of stocks

Although stocks are considered a profitable investment in the long term, buying stocks also entails a number of risks.

• Securities market price fluctuations — share prices can rise or fall sharply due to market sentiment, geopolitical events or investor emotions.

• Company financial problems — if a company's profit declines, debts arise or business difficulties emerge, the value of the shares can fall significantly.

• Economic crises — recessions, high inflation or financial shocks often have a negative impact on most stock markets.

• Sector downturns — problems in a specific sector, such as technology or real estate, can also reduce the value of shares of companies operating within it.

In the global market, share prices can rise and fall even within a few hours, which is why they are generally more suitable for investors who plan to invest for the long term and are able to keep a cool head while experiencing price fluctuations.

Bonds — A debt instrument with fixed interest

Bonds are substantially different from stocks. While stocks mean ownership rights in a company, bonds are a debt instrument. By purchasing bonds, the investor effectively buys a debt instrument issued by a company or government for a specified period.

In return, the investor usually receives regular interest payments and the repayment of the principal at the end of the term.

Why bonds are often considered safer

Compared with stocks, bonds typically have:

• Smaller price fluctuations.

• More predictable income.

• A clear maturity date.

However, this does not mean that bonds are without risk.

Main risks of bonds

• Credit risk — the issuer may be unable to repay the debt.

• Interest rate risk — if interest rates rise in the market, new bonds are issued with higher yields, which makes existing bonds less attractive, and as a result their price falls.

• Inflation risk — inflation can reduce the real value of fixed interest payments.

The difference between stocks and bonds

The difference between stocks and bonds is one of the most important factors when choosing an investment type. Stocks are more oriented towards growth and a higher potential profit, while bonds focus on more stable income and lower volatility. The broader difference between stocks bonds and securities such as ABS or fund units is one of the first things every investor should understand.

In a simplified comparison:

• Stocks — higher risk, higher potential return, income not predictable.

• Bonds — lower risk, lower return, relatively predictable income.

Asset-backed securities — investments based on cash flows

In recent years, asset-backed securities (ABS) have been gaining increasing popularity in the alternative investment segment. They mainly attract investors who want to try alternative investment opportunities and appreciate the balance between higher returns and regular cash flows.

So, what are asset-backed securities exactly? ABS are financial instruments whose value and income are based on the cash flows from specific assets or loan portfolios. A financial institution or investment platform, such as TWINO, pools many loans into a single portfolio against which securities are issued.

Investors are offered the opportunity to purchase a structured financial product with specific conditions, term, return and cash flow. In other words, this is how do asset-backed securities work: the income for investors is generated by the underlying pool of assets, not by a single borrower or company.

Asset-backed securities explained: the underlying collateral

The ABS structure is built on a defined pool of cash-generating assets. The collateral can include:

• Consumer loans.

• Car leases.

• Mortgage loans.

• Business loans.

• Real estate.

• Other financial assets.

TWINO ABS products

TWINO offers investments in various asset-backed securities, which are available on the platform as loan-backed securities. They typically have a pre-defined (fixed) interest rate in the range of 8 to 12 per cent per year, depending on the specific security.

The minimum investment starts from 1 euro, making this investment type accessible to a wide audience. The TWINO platform operates in an environment regulated by the Bank of Latvia, which provides an additional layer of safety and investor protection compared with unregulated alternative investment options.

However, it is important to remember that the actual return is not guaranteed but depends on the payment discipline of borrowers and the overall performance of the portfolio.

Advantages of asset-backed securities

• Diversification — investment risk is spread across many loans or assets, thus balancing the impact of individual unsuccessful investments.

• More predictable cash flows — many instruments provide regular interest payments.

• An alternative to traditional markets — asset-backed securities are often less sensitive to stock market fluctuations.

Risks to take into account

Although diversification helps reduce risk, asset-backed securities are not entirely risk-free. The investor may lose part or all of the invested capital.

The main ABS risks:

• Late borrower payments — if some borrowers are late or do not make payments, the cash flows received by investors may decrease.

• Economic downturn — during times of economic difficulty, the risk increases that more borrowers will be unable to meet their obligations.

• Deterioration of portfolio quality — if the underlying loan portfolio contains too many risky or poorly assessed loans, potential losses increase.

• Liquidity risk — some asset-backed securities can be more difficult to sell quickly at the desired price than traditional stocks or bonds.

Investment funds — simpler diversification

Another popular solution for private investors is investment funds. They pool the funds of many investors and invest them in various assets — stocks, bonds, real estate and other financial instruments.

The most popular investment funds are:

• Index funds.

• ETFs.

• Actively managed funds.

The main advantage of investment funds is broad diversification — with a single investment, the investor gains access to a wide range of assets.

However, the following factors should also be taken into account:

• Management fees — many funds, particularly actively managed ones, charge management fees, which can significantly reduce the overall return in the long term.

• Market fluctuations — even a diversified fund is not protected from market fluctuations. If stock or bond markets fall, the value of the fund can also decline.

• Investor dependence on the fund's strategy — the investor does not choose specific securities; this is done by the fund manager in accordance with the fund's strategy, which in case of failure can negatively affect the fund's performance.

How to choose the most suitable type of security

There is no single universally correct investment solution. The most suitable financial instrument depends on each investor's goals, risk tolerance and time horizon.

Likewise, the importance of diversification should not be underestimated. To reduce risk and build a more stable investment portfolio, investors are advised to spread their funds across different types of securities. This approach helps balance the potential return and risk, since different financial instruments tend to behave differently during market fluctuations.

For greater clarity, we have compiled a comparison of the most popular investment options for private individuals and their key parameters.

Comparison of investment types

Stocks

Type: ownership securities. Approximate expected return: about 7 to 12 per cent per year in the long term. Risk level: high. Liquidity: high (for exchange-traded stocks). Suitable for investors with a longer time horizon and a higher risk tolerance.

Bonds

Type: debt instrument. Approximate expected return: about 3 to 8 per cent per year. Risk level: low to moderate. Liquidity: moderate to high. Suitable for investors looking for more stable income and lower volatility.

Asset-backed securities

Type: structured debt instrument. Approximate expected return: about 7 to 15 per cent per year (higher rates are usually associated with higher risk). Risk level: moderate to high. Liquidity: moderate. Suitable for investors who want regular cash flows and portfolio diversification.

Investment funds

Type: collective investment instrument. Approximate expected return: about 4 to 10 per cent per year. Risk level: low to moderate (depending on the fund). Liquidity: high. Suitable for investors who want simple diversification and professional management.

Note: the indicated return is approximate, historically typical for various markets and instruments, and usually shown as a gross result. The actual net return may be lower after commissions, taxes and possible losses. These figures do not guarantee future results.

In conclusion

Each financial instrument has its own operating principle, risk level and potential return. An understanding of different types of securities is one of the most important steps on the path to thoughtful investing that aligns with your financial goals and long-term strategy.

To better navigate the diversity of financial instruments and find the investment solution most suitable for you, take a look at the Products, Resources and FAQ sections of the TWINO website.

Email: [email protected]
Address: Dzirnavu iela 42, Riga, LV-1010, Latvia

This material is for informational purposes and is not individual investment advice.