Investing in general, and particularly stocks and bonds, often confuses the general public. The following brief overview will provide you with some basic guidance regarding these topics so that you can decide how to invest your money more wisely.
Bonds
A bond means that you are lending an institution money, somewhat like an IOU. In exchange, the purchaser of the bond, usually called the issuer, pays interest on the money they use. The bond eventually reaches a full maturity value when payment in full is due.
For example, if you purchase a $10,000 bond at 8 percent with a 10 year maturity, then you will receive $800 interest every year for the next 10 years, often in two bi-annual payments. At maturity, you will receive repayment of $10,000.
Bonds do not carry the same risk or reward that stocks do. They are straightforward investments with guaranteed returns. In exchange for guaranteed earnings, the returns are much less when compared with stocks. Most experts recommend that you invest part of your money into both bonds and stocks. The risk of the stocks nicely complements the stability of the bonds.
Stocks
Stocks, as in the stock market, conjure up an image of Wall Street and high finance. The entertainment industry has released movies about how investors have made millions and even more through shrewd investments. However, the market crash of 2008 has made many potential investors cautious when it comes to putting their money into an unknown market.
However, much misinformation has circulated about stocks and how they work. People sometimes view them as a “get-rich-quick” schemes. Education about stocks and bonds will help you make wise decisions about investing.
Stock means part ownership, however small, in a company. Some people instead refer to stocks as equity or shares. A stock might also come with voting rights and having a say in the operation of the company. When you purchase a stock, you receive a “certificate” to prove your ownership although this is now done electronically instead of using physical documents.
Even so, a shareholder does not determine day-to-day business dealings of a company. Instead, management is in charge of boosting the company’s value in the best interest of the stockholders. If they fail to do so, then shareholders technically have the right to speak into what is happening. In reality, most shareholders own just a fraction of a percentage of the company, making their say very small.
Stockholders often receive dividends related to how well the company does. When a company goes bankrupt, you might receive only portion only when all assets, including any real estate, have been sold and other debts have been paid. However, as a stockholder, you have limited liability, which means that you will not be held responsible if the business fails to meet its financial obligations.
Considerations for Stocks
The benefits of stocks include:
- Best during a thriving economy
- Beat inflation
- Accessible/ease of purchase
- Ease of selling and
- Earning money through buying low and selling high.
The following disadvantages make stocks risky for some people:
- Time consuming to learn about stocks
- Competing against professionals who have time to learn about stocks
- The vulnerability of your entire investment, especially if the company goes bankrupt.
- You receive payment last in the event of bankruptcy and
- Following stocks can be an emotional roller coaster.
Considerations for Bonds
People enjoy the following benefits when they invest in bonds, including preset terms, timely payouts and stable income. However, disadvantages include lower payouts and penalties for early payoffs.