Stocks & Bonds
Stocks & Bonds
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing. Over the last few decades, the average person’s interest in the stock market has grown exponentially. What was once a toy of the rich has now turned into the vehicle of choice for growing wealth. This demand coupled with advances in trading technology has opened up the markets so that nowadays nearly anybody can own stocks.
Holding a company’s stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company’s earnings as well as any voting rights attached to the stock. A stock is represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership.
In today’s computer age, you won’t actually get to see this document because your brokerage keeps these records electronically, which is also known as holding shares “in street name”. This is done to make the shares easier to trade. In the past, when a person wanted to sell his or her shares, that person physically took the certificates down to the brokerage. Now, trading with a click of the mouse or a phone call makes life easier for everybody. The management of the company is supposed to increase the value of the firm for shareholders.
For ordinary shareholders, not being able to manage the company isn’t such a big deal. After all, the idea is that you don’t want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you’ll receive what’s left after all the creditors have been paid.
This last point is worth repeating: the importance of stock ownership is your claim on assets and earnings. Without this, the stock wouldn’t be worth the paper it’s printed on. Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their house, car, furniture, etc.
Owning stock means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them.
The first sale of a stock, which is issued by the private company itself,is called the initial public offering(IPO). Bonds A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U. S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.
The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bonds, municipal bonds, and U. S. Treasury bonds, notes and bills, which are collectively referred to as simply “Treasuries”. Two features of a bond – credit quality and duration – are the principal determinants of a bond’s interest rate.
Bond maturities range from a 90-day Treasury bill to a 30-year government bond. Corporate and municipals are typically in the three to 10-year range. A strategy for managing fixed-income investments by which the investor builds a ladder by dividing his or her investment dollars evenly among bonds or CDs that mature at regular intervals simultaneously (for example, every six months, once a year or every two years). A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called. Also known as a “redeemable bond”.
The main cause of a call is a decline in interest rates. If interest rates have declined since a company first issued the bonds, it will likely want to refinance this debt at a lower rate of interest. In this case, company will call its current bonds and reissue them at a lower rate of interest. Bonds with higher duration carry more risk, making this measure an important one for investors to calculate. The date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and is repaid to the investor and interest payments stop.
It is also the termination or due date on which an installment loan must be paid in full. The maturity date tells you when you will get your principal back and for how long you will receive interest payments. However, it is important to note that some debt instruments, such as fixed-income securities, are “callable”, which means that the issuer of the debt is able to pay back the principal at any time. Thus, investors should inquire, before buying any fixed-income securities, whether the bond is callable or not.