what are stocks and bonds
Even distant from the world of Finance and investment, people familiar with the concepts of what are stocks and bonds are securities, offering opportunities for capital investment. Although stocks, and bonds are instruments of the stock market, investment mechanisms and nature of the securities is different in many ways.
what are stocks and bonds: Bonds of
Note - this is a kind of loans. By investing in bonds, You actually borrow the funds of the company or the state (depending on whose bonds choose), and they in turn issue a document certifying the acceptance from You money and promise to pay You interest on the expiry of the loan. Bonds are often traded on OTC markets and may be purchased through brokers.
The value of the bonds depends, in particular, from the overall interest rate in the economy. In General, the interest rate directly affects the value of Your investment. For example, if You own the bond to 1000 USD with 5% per annum, and the total interest rate below 5%, You can sell the bond at a higher cost. If the total interest rate above 5% of the value of Your bonds will decrease, to cover the gap between the interest rate and income from securities.
In the case of the bonds the investor will not receive a direct benefit from the success of the company. Income on bonds does not depend on the company's profit, it is fixed and is limited to the stated interest (or coupon) rate.
Another important point is the date of expiry or the life of the bonds. During this time the bond is redeemed, and the investor returns the value of the paper. Periods of validity of the notes may be various: from very short to long-term, for example, 30 years.
The major risk in buying the bonds are non-payment of the investor it means, that is, not a refund of the original value of the paper. This risk can be reduced by carefully selecting the companies or institutions, bonds of which You plan to invest. The most reliable from this point of view are paper creditworthy companies, «blue chips» and, of course, government bonds.
Sometimes investors deliberately go to the increase in the risk of acquiring bonds unstable and medium-sized companies for the sake of a higher coupon payments. In the event of bankruptcy of the company, the holders of the bonds are the preferred creditors: compensation are paid in the first place, before the holders of the shares.
what are stocks and bonds: Stocks
Share - it is, in fact, the share in the company. The more You share, the greater part of the company You own.
Shares can be ordinary and preferred shares. Dividends on preferred shares shall be paid in the first place, but the holders of securities of such issuers generally may not affect the company's activity and do not participate in decision-making. However, the dividend is not the main income of the investor.
In contrast to the value of the bonds, the price of the stock is constantly changing under the influence of market conditions, the results of operations of the company, fundamental political, economic, social factors, etc.
There are several ways to profit from the stock. Firstly, the direct purchase and sale of securities on the stock market. The investor can sell his shares, if from the time of purchase, they rose in price, and get a profit from the difference between purchasing and selling prices. It is also possible to receive speculative gains through trade options on shares (a kind of a futures market) or CFD Forex market is derived from the contract of purchase and sale of the shares, will not allow registration of the property rights to these securities. In both cases, the trade in shares can be made via the Internet through the stock and Forex brokers.
As in the case with the bonds, there is a direct risk associated with the choice of the careless or the weak of the Issuer's shares. In addition, bears a risk of speculative trade: a forecast of the investor to amend the rate may prove to be incorrect, which will bring losses.
Conclusion
Any investment potentially risky. As you can see, the bonds carry less risk, but are less flexible instruments and provide fewer opportunities for profit. The choice of an acceptable correlation of risk and yield always remains with the investor. If given enough time studying the companies-issuers and market analysis in the trade of securities and derivative from them, the investments both in shares and in bonds may become profitable.
