There are many terms used in everyday speech about investment options, e.g. securities, shares and bonds. The umbrella term is financial instrument, but there are laws on markets for financial instruments that set a framework for dealing with the types of investments covered by the term. Here is an overview of the main types of financial instruments and they are explained.
Shares
- A share is a shareholder's confirmation of ownership in a public limited company.
- A shareholder enjoys rights according to the law and the articles of association of the public limited company.
- Shareholders can be paid dividends from shares, which are often referred to as return on equity.
- The value of shares can go up or down.
- In the event of the bankruptcy of a public limited company, all the capital can be lost.
- Investing in stocks can be risky.
- Price volatility i.e. share price fluctuations reflect the risk related to the shares.
- Shareholders are the last in the order of claims if a public limited company goes bankrupt, all the capital can therefore be lost if there are not enough assets to pay all creditors. Shares can therefore become worthless.
- Shares that have been admitted to trading on a regulated market, are registered electronically in a central securities depository.
- The issuer of shares admitted to trading on a regulated market (the listed company) must meet detailed disclosure obligation requirements.
- The issuer's obligation to provide information to the stock market is to ensure the equal treatment of investors so that all investors have the same information at the same time and can make informed decisions about trading in the shares.
- The spread, i.e. the difference between the buying and selling prices of listed shares gives an indication of how much trading there is in the shares. A large gap between the bid and ask price (i.e. a wide spread) indicates that the liquidity of the shares is low and there is a greater risk that individual transactions will affect their price.
- A wide spread indicates that price volatility can be high. Short-term investors therefore prefer to trade in stocks that have a narrow spread.
- In order to increase the liquidity of shares and contribute to more efficient price formation, issuers can enter into an agreement with a market maker to buy and sell a certain number of shares at a price that has a predetermined deviation from the last trading price. Information on whether a market maker has shares can be obtained from stock exchange information sources.
- Act No. 115/2021 on the Market for Financial Instruments.
- Act no. 20/2021 on the disclosure obligation of issuers of securities and flagging requirements.
- Act no. 60/2021 on Actions against Market Abuse.
- Act no. 14/2020 on Prospectuses for Public Offerings.
- Act no. 7/2020 on Central Securities Depositories and Settlement and the Electronic Registration of Financial Instruments.
- Act no. 108/2007 on Acquisitions
- Act no. 2/1995 on Public Limited Companies
- The Central Bank of Iceland monitors the disclosure obligation of issuers of financial instruments that have been admitted to trading on a regulated market.
- The Central Bank of Iceland supervises the activities of stock exchanges, regulated markets, multilateral trading facilities and central securities depositories.
- The Central Bank of Iceland supervises transactions on the market.
- The Central Bank of Iceland supervises to ensure that financial undertakings operate in accordance with rules no. 353/2022 on conduct of business practices, communications with customers and the handling of complaints.
- The Central Bank of Iceland receives comments from investors if the practices of investment firms are not in accordance with laws and regulations. You can submit a comment or query here.
- The Central Bank of Iceland refers people to information on its website about consumer remedies but also guides consumers in other respects about the options available to them to assert their rights. Procedures of the Financial Supervision Authority of the Central Bank of Iceland regarding queries and notifications can be accessed here.
- The Central Bank of Iceland does not have the power to rule on individual disputes nor does it determine the rights or obligations of parties under private law or resolve disputes over the merits of cases.
Bonds
- A bond is an acknowledgment by the issuer of the bond that it has an obligation to repay a specified amount at a predetermined time at a predetermined interest rate to the owner or holder of the bond.
- There are various types of bonds. They can, for example, be indexed or fixed-income with equal instalments or equal payments.
- If a bond is index-linked, the balance of the principal changes in accordance with a predetermined index, e.g. Consumer Price Index (CPI).
- If a bond is fixed-income instrument, the principal decreases by the amount equal to its repayments and it therefore does not follow the development of inflation.
- Bonds bear interest that can be fixed or variable. With a fixed interest rate, the interest rate remain unchanged for a set period or until the maturity date of the bond. With variable interest rates, it is agreed that interest rates rise or fall in line with interest rate developments on the financial market, which are usually based on the central bank's policy rate.
- There are countless types of bonds and they can depend on, for example, underlying factors. Such bonds are considered complex financial instruments and retail investors are advised not to invest in them.
- Retail investors who intend to invest in bonds need to consider what the objective of the investment is, for how long it is made and how much risk they are willing to take.
- Treasury bonds are considered the least risky bonds.
- It is important to realise that bond prices fluctuate depending on market conditions.
- It is a good idea to seek advice from banks or investment firms before investing in bonds.
- Act No. 115/2021 on the Market for Financial Instruments.
- Act no. 20/2021 on the disclosure obligation of issuers of securities and flagging requirements.
- Act no. 60/2021 on Actions against Market Abuse.
- Act no. 14/2020 on Prospectuses for Public Offerings.
- Act no. 7/2020 on Central Securities Depositories and Settlement and the Electronic Registration of Financial Instruments.
- Act no. 38/2001 on Interest and Indexation
- The Central Bank of Iceland monitors the disclosure obligation of issuers of financial instruments that have been admitted to trading on a regulated market.
- The Central Bank of Iceland supervises the activities of stock exchanges, regulated markets, multilateral trading facilities and central securities depositories.
- The Central Bank of Iceland supervises transactions on the market.
- The Central Bank of Iceland supervises to ensure that financial undertakings operate in accordance with rules no. 353/2022 on conduct of business practices, communications with customers and the handling of complaints.
- The Central Bank of Iceland receives comments from investors if the practices of investment firms are not in accordance with laws and regulations. You can submit a comment or query here.
- The Central Bank of Iceland refers people to information on its website about consumer remedies but also guides consumers in other respects about the options available to them to assert their rights. Procedures of the Financial Supervision Authority of the Central Bank of Iceland regarding queries and notifications can be accessed here.
- The Central Bank of Iceland does not have the power to rule on individual disputes nor does it determine the rights or obligations of parties under private law or resolve disputes over the merits of cases.