Stock and Bond Investing Basics
When a company seeks capital (money) to grow, they turn to investors in the capital markets to raise these funds. Investors can be individuals (you), or institutional investors, such as pension funds, mutual funds, insurance companies, banks, foundations, charities, and other entities.
A company issues stock and that stock represents partial ownership or shares in that company, so buying stock is buying ownership in a corporation. Stock prices change throughout the day and from one day to the next. Besides general economic factors, current and future stock prices are largely dictated by the future and expected financial prospects of the company, its industry, and the economy as a whole. Stock prices you see quoted online, on television, on mobile devices and other media are prices for one (1) share of a stock and can range in price of less than $1 to tens of thousands in very rare instances. As an owner, you are entitled to any corporate profits paid by the company. The profits distributed by a company are known as dividends. Because of this ownership representation, owning stock is commonly referenced as having equity in a corporation.
When an organization issues a bond, it is creating a debtor/creditor situation, where the organization doing the borrowing is considered the debtor and the entity on the other end that is lending money to the borrowing organization is the creditor. A borrowing organization can be a city, county, state, an agency affiliated with a city, county, or state, a corporation, or a government. If the issuing organization is a city, county, state, or an affiliated agency of a city, county, or state its bonds are known as municipal bonds. If the issuing organization is a corporation those bonds are known as corporate bonds and bonds issued by governments, agencies, or quasi-governmental entities, those are considered government bonds.
A bond represents an IOU or loan you have made to governments or corporations and their promise to pay you interest for the use of your money and the return of your principal (your money) at some time in the future. That future time can be a few months or as long as 30 years. At the time of your purchase or investment in a bond, details such as the price of the bond (usually in increments of $1,000 with minimums usually set at five (5) bonds or $5,000), how much interest will be paid (expressed as an percentage rate (%)), and when it will be paid (annually, semi-annually, quarterly, etc.), and the maturity date (when your money is repaid) are disclosed. A bond issuer is only obligated to repay what was borrowed and the interest rate is usually fixed for the life of the bond.
You obtain shares of stock by buying a stock and you dispose of it by selling it. This process can be facilitated by a full-service brokerage firm and brokers affiliated with it, an online or discount brokerage firm and brokers affiliated with it, or in some cases, directly through the company.
When you buy an asset and sell it for a greater amount that its cost, the difference between the cost and the amount for which it was sold is known as a capital gain. If the amount for which it was sold is less than its cost, the difference is considered a capital loss.
To learn more about stock and bond investing basics, contact Jones Wealth Management Group at 901-312-9166 for a no-cost consultation.