What is a stock and a bond. Differences and risks

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In our time, there are many different ways to effectively invest your capital. You can open a bank deposit, buy real estate, trade currencies on Forex, or buy gold bars. In this article, we want to draw your attention to the stock market. A huge number of various securities are circulated on it, each of which has its own specifics and features. Let's try to tell in more detail what a stock is, what a bond is, since these securities are most often of interest to potential investors.

What is a promotion?

This paper is perhaps the most common trading instrument on any stock exchange. Shares are issued (issued) upon the foundation of various joint-stock companies or as a result of the reorganization of an enterprise into a company of this type. The initial value of one share is determined through the ratio of the size of the authorized capital to the number of such securities. They are realized among the shareholders, and thuseach of them contributes to the development of this company. Anyone who owns shares is en titled to receive income as a result of the profitable operation of the enterprise at the end of the reporting year, if the majority of shareholders vote in favor of this at the mandatory annual meeting. It happens that a company suffers losses or a decision is made to invest all profits for re-equipment or development of the company.

What is a bond?

After we have analyzed what stocks are, let's move on to the essence of bonds. Like shares, these papers are also issued in order to raise additional capital. They are issued into circulation for a predetermined period, during which the owner of the bonds receives a clearly defined income in the form of a percentage of the original cost. When the circulation period expires, the bonds are returned to the issuer and receive a discount in return - the amount of funds that were originally paid upon purchase.

Stocks and bonds. Similarities and differences

The similarity of these securities is that they both serve as a source of attracting the necessary financial resources. Purchased as a result of the initial issue, they can be subsequently sold at a better price to other investors. With the help of stocks and bonds, you can receive income both from the ownership of these securities, and in the form of the difference between the purchase price and the sale price to other investors.

The difference lies in the ability to manage the issuing company. What is an action from this point of view? This is a paper that says that its owner isco-owner of the company and has the right to take part in making all important management decisions. At the same time, a bond is, in fact, an IOU certifying that a person has loaned funds to the state or an enterprise and after a certain period of time will receive a fixed remuneration for this. As a rule, dividends on stocks exceed the interest on bonds, but at the same time, investing in stocks is more risky, as market conditions are constantly changing, and it happens that a recent favorite quickly turns into an outsider.

Thus, the investor can choose what is best for him: a reasonable risk with a higher return, or stability with a small but guaranteed profit. Knowing what a stock is and how it differs from bonds, you can distribute your capital in the optimal proportion between various financial instruments. Such diversification will allow finding the very "golden mean" that will bring stable prosperity in the future.