Stocks and bonds
For starters, let’s break down the meaning of stocks.
A small part of a company. This might be the easiest explanation. And it’s somehow true. When you buy stock, you buy a small piece (or a share) of a company.
You may also find the term under “shares” or “equity”, but the meaning is the same: a type of security that provides ownership of a company, while providing claim on the part of the corporation’s assets and earnings. The term “equity” comes from the fact that the shareholders have equity (ownership) in the company.
Of course, the ownership is “measured” depending on the number of shares that one owns, relative to the number of outstanding shares.
In what concerns investments and investment strategy, stocks and the mutual funds that own them, are like a cornerstone. Moreover, statistics show that they have outperformed other investments in the long run.
Why should you invest in stock? Not only this is the foundation to any investment, but, of course, you can earn a satisfying income, in two ways: capital gains and dividends.
The capital gain is the income that resulted after selling your shares. So, if you bought at a low price, but afterwards the price went up and you decided to sell, the difference that resulted is called capital gain. Therefore, a source of income. In case of decrease and selling at a lower price, this would result in a capital loss.
Dividends are small amounts of the company’s profit, paid to the shareholders. However, it is not compulsory for companies to pay them and if they do, they can stop at any time.
Like stocks, bonds are also a fixed income investment. The difference resides in the fact that, while when buying stock, you buy part ownership, when you invest in bonds, you “borrow” the company. The investor decides to loan a certain amount of money to an entity (corporate or governmental) for a fixed period, at a certain interest.
When investing in bonds, you become a debt-holder or creditor of the issuer.
For companies that are looking to grow, finance new projects, develop in a certain direction, issuing bonds may seem like a better strategy then obtaining a loan from a bank.
When issuing a bond, companies state by contract the interest rate to be paid, at the given time, at which the loaned funds (bond principal) must be returned (maturity date). The interest rate represents the earnings of the creditor.