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What are tokenized stocks, and should you invest in them?

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DISCLAIMER

The information contained in this material is for informational purposes only. Any suggestions or opinions expressed in this material should in no case be construed as professional advice or an offer to purchase any of the mentioned assets.

Share tokenization is a new trend in raising capital for companies and in investments for private investors. It opens up new opportunities for all parties, and thanks to this, it is gradually gaining popularity. As a result, information about tokenized assets is spreading more and more. In connection with it, many investors wonder if it is worth investing in them. Stobox, an asset tokenization company, will tell more about tokenization and investing in tokenized assets in this article.

What are shares?

Before answering questions about tokenized assets, it is necessary to understand what traditional shares are. A share is a security issued by a company that gives the owner certain rights. Depending on the type of shares, the holder may be entitled to a part of the profit, dividends, company management, participation in voting, etc. Companies issue shares to raise additional funds for business development. They can sell shares to private investors or via IPO, an Initial Public Offering. The difference lies in the fact that during a private placement, shares are sold to a pre-agreed list of investors (as a rule, it’s 1-3 large institutional investors) and are not available to everyone. 

An IPO is a public offering. In this case, the shares become available to everyone, since the main goal of the IPO is to attract as many investors as possible. After the IPO, the shares are listed on stock exchanges, for example, on the NASDAQ, New York (NYSE), or London (LSE). Some stocks are listed on multiple exchanges, but companies often list securities on only one trading platform. For example, Apple shares can only be bought on the NASDAQ. According to the schedule, trading on stock exchanges always takes place on weekdays. The exchanges are closed on weekends, holidays, and after-hours on weekdays. 

A retail investor cannot trade directly on the stock exchange – this requirement is the same for all countries. Trading can only be carried out through an intermediary – a broker who charges their own commission. Shares are sold in lots – this is a block of shares, which may include, for example, 10 or 100 shares. You should buy at least one lot.

What are tokenized assets and tokenized shares?

Tokenized assets are tokens based on some underlying asset. Stocks, precious metals, energy resources, real estate, etc., can be tokenized. The token’s price also depends on the underlying asset, and it follows the value of the underlying asset. Thus, trading tokenized assets allows you to receive the same profit as trading classic instruments. However, in contrast to the traditional market, other types of securities are offered as tokens in addition to shares – debt, revenue sharing, income sharing, and convertible preferred stock. Companies can be more creative in their financing, and thus create unique business models.

Tokenized assets have broader functions than other types of digital assets. For example, a token holder may have the right to receive dividends, vote, etc. The owners’ rights are written in smart contracts that guarantee their execution. 

When an asset is tokenized, a company issues security tokens corresponding to a stock, bond, derivative, etc. Unlike other types of tokens, security tokens are considered by financial regulators as securities. Accordingly, the rules for security tokens are similar to classic shares. These regulations provide legal protection for investors. In case of illegal actions of the issuer, they have the right to apply to the regulator and to the court.

Unlike classic financial instruments, tokenized shares are traded 24/7. Operations can also be carried out on public holidays. You do not need a broker or other intermediary to work with such assets. Another important aspect is that tokenization does not require the sale of lots. Every single share can be tokenized. It allows investors to buy as much as they want or can afford without being tied to lots.

Issuers of common shares or other securities create ownership records in registries and then put the objects up for trading. After the transaction is completed, appropriate changes are made to the registers. With tokenized assets, the situation is similar, but the blockchain is the registry. As a result, blockchain provides reliable information protection and fast transactions.

Some of the tokenized shares of popular companies include: 

  • TSLA by Tesla;
  • NFLX by Netflix;
  • GOOGL by Google, etc. 

Still, tokenization is not just an opportunity to buy already existing shares in another form but also to enter a completely new market of investments that were not previously available. Tokenized stocks can be traded 24/7 from anywhere in the world, so they are more accessible to small investors from emerging markets, and you do not need to use intermediary brokers to buy them. Thus, exchanges for tokenized assets are becoming more relevant than traditional exchanges, such as the NYSE or LSE. 

Stobox has also issued its tokenized shares, STBX. 100% of the share equity of the company were transformed into security tokens on Ethereum Blockchain. Investors from all over the world are welcomed to buy any amount of tokenized shares of Stobox to receive shareholder rights to equity and dividends. 

Why buy tokenized shares when you can buy bitcoin?

Investments in stocks are very popular because of their specifics. It is a much more stable asset than bitcoin or any other cryptocurrency. Stocks are backed by the success or failure of the business. Their value can be predicted in both the short and long term. There are securities with varying degrees of risk – low-risk, medium-risk, and high-risk investments. Investors can choose securities according to their strategy.

Cryptocurrency is always a high-risk asset, and it is important to consider this when planning an investment portfolio. Bitcoin is not backed by anything, and its price is determined primarily by supply and demand, which can change at any time. It is difficult for cryptocurrencies to predict the growth or fall time; the trend’s strength is hard to analyze. It is almost impossible to predict its behavior in the long term. In addition, as crypto and utility tokens become more regulated, they are now losing some of their benefits. There is a greater risk that utility token issuers will be subject to lawsuits, and therefore it is safer to invest in security tokens that are regulated by default.

A tokenized asset is like regular stock but with the benefits of cryptocurrencies. Blockchain provides reliable data storage and convenient operations. But at the same time, a tokenized share is, first of all, a share. The rate is always equivalent to the stock price of the issuing company. Trend movement is analyzed in a similar way to stocks, not cryptocurrencies. In addition, the recognition of security tokens by regulators as securities provides legal protection for investors. Cryptocurrencies are still not regulated in many countries, and some states even seek to ban bitcoin altogether.

Summary

Tokenized shares are worthy of attention as investment assets. Tokenized shares represent digital versions of usual shares, information about which is stored on the blockchain. Tokenization allows you to use the advantages of the blockchain while preserving the essence of the stock itself – price predictability, dependence on the fundamental indicators of the issuing company, and legal protection. At the same time, holders can receive the same rights as holders of classic shares. As a result, tokenized assets are gaining popularity, and the demand for this technology among investors will grow, Stobox experts predict.

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