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Meaning / Definition of

Synthetic Investment

Categories: Finance,

A synthetic investment simulates the return of an actual investment, but the return is actually created by using a combination of financial instruments, such as options contracts or an equity index and debt securities, rather than a single conventional investment. For example, an investment firm might create a synthetic index that seeks to outperform a particular index by purchasing options contracts rather than the equities the actual index owns, and using the money it saves to buy cash equivalents or other debt securities to enhance its return on the derivatives. Options spreads, structured products, and certain investments in real estate and guaranteed investment contracts can be described as synthetic products. While they are artificial, they can play a legitimate role in an individual or institutional investor's portfolio as a way to reduce risk, increase diversification, enjoy a stronger return, or meet needs that conventional investments don't satisfy. However, synthetic investments may carry added fees and add more complexity than you are comfortable dealing with.

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Definition / Meaning of

Preference Shares

Categories: Stocks, Fundamental Analysis, Accounting,

capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, preference shares pay a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preference shares are that the investor has a greater claim on the company's assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock. also called preferred stock.

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