With inflation on the rise in 2021, American investors are trying to figure out their best hedging strategies in an effort to withstand what could be a volatile market environment. The United States Federal Reserve has already signaled its intent to drive interest rates higher as a means to cool the markets down if necessary. We are already seeing signs of inflation with regard to consumer prices, so it is safe to assume that we may be entering an inflationary period.
Prospective stock investors who are entering the market at a time when inflation looms need to be more careful about the choices they make. It is important to become familiar with the various types of equity securities and how they may react in a market that could turn volatile. If you already hold bonds in your portfolio, you will want to consider the stock market at this time, particularly preferred stock because you may be able to find opportunities that pay fixed dividends even during volatile periods.
Most of Wall Street can be split into common stock, preferred stock, and exchange-traded funds. Both common and preferred stock can pay dividends, but you are guaranteed this additional income with preferred stock even if the company posts less than stellar earnings reports during inflationary periods. Bond rates may drop when inflation is active, but holders of preferred stock will still get the dividends stipulated by the investing agreement.
Even though preferred stock does not confer voting rights, there are two other reasons you may want to hold these shares to hedge against inflation:
* Preferred stock is far less volatile.
* If things get ugly and the company becomes insolvent, preferred stock holders will be paid before those who hold common stock.
Now that we have discussed common and preferred stock, we can discuss exchange-traded funds (ETFs), which are special equity securities that have been capturing the attention of Wall Street investors over the last couple of decades. ETFs are professionally managed portfolios that price the performance of various assets. The most popular ETF is the SPDR S&P 500 Trust, which lets you invest in all the companies that make up that benchmark index.
It is easier to think about ETFs in terms of comparing them to mutual funds, but they have the superb advantage of functioning just like common stock. You can acquire one or more ETF shares and trade them as if they were Tesla stock. Whether you are an active or passive trader, there is a good chance that you will find ETFs that match your investing style and overall interest. To give you an idea about the range of trading opportunities, the Securities and Exchange Commission approved two Bitcoin futures ETFs in 2021.
The ETF market on Wall Street has grown to generate billions of dollars worth of trading volume on a daily basis. Some ETFs are highly focused and only track the performance of preferred stocks issued by blue chip companies; as such, they are not so volatile, but investors should keep in mind that they will not be getting dividends because they are already priced into the ETF.