Are you at a point in your life where you would like to invest your money for future growth? In this blog, we provide you with the essential information you need to know about stocks and bonds so you can make an educated decision on how you would best invest your dollars.
Bonds are long-term lending agreements between a borrower and a lender. For example, when a municipality (such as a city, county, town, or village) needs money to invest in infrastructure, it issues bonds to finance the project. Separately, corporations will issue bonds to raise funds for capital expenditures, operations, and acquisitions. For comparison, a bond purchase is similar to any agreement you may sign to finance a car or house. The issuer of the bond sets the interest rate and bond term. As the bond matures, the bondholder will receive interest payments, and by the time the bond expires, the bondholder will be paid back at least the amount of the bond’s face value, if not more. For the bond issuer, the bond is a source of financing, and for the bondholder, the bond is a form of investment.
What are bonds?
- Debt created with an investor for cash in exchange for payouts of interest
- Typically traded OTC (over the counter)
- Based on 1929 as a starting year, bonds have earned around 6% each year
- Bonds can be created as corporate, municipal or treasury bonds
Stocks are securities that represent an ownership share in a company. A stock is an investment. When you purchase a company’s stock, you’re purchasing a share or a small piece of that company. Investors purchase stocks in companies they expect will rise in value. If the company increases in value, the company’s stock increases in value as well. It is then that the stock can then be sold for a profit.
What are stocks?
- Issues of a stake of ownership in a company
- A claim to the company’s assets and earnings that often give the investor voting rights and pays dividends
- Typically traded through a central exchange (NYSE)
- Based on 1929 as a starting year, stocks have earned around 10% each year
- Are issued by companies at a stock exchange as IPO’s
What is an IPO?
An IPO is an “initial public offering,” meaning stock of the company is offered to become a publicly traded enterprise. Doing so raises money for expansion and development.
What are dividends?
Dividends are a portion of a company’s earnings, paid out to investors on a quarterly or annual basis. This payment can be in the form of cash, additional shares of common stock, or, in some cases, property.
What is riskier, stocks, or bonds?
Stocks tend to have a higher payout percentage; and also the riskier investment. Due to the fluctuations in the stock market, stocks can be riskier short term. Bonds operate off fixed income rates, which will frequently pay out annual interest rates to the bondholder. Bonds also repay the amount in full at a given time (when the bond expires), while stocks do not guarantee the investor the face-value return on their investment. For this reason, bonds are generally considered a safer investment in the short term or for new investors.
Ready to Start Investing?
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