Investing your money wisely is one of the most important things to learn. There are many investment opportunities that are available and it is important to know the difference between them. The two most basic and commonly known investment opportunities are stocks and bonds. Let’s take a look and understand exactly how they work.
Stocks are issued by corporations only and pay out dividends to the owner of the respective stock. This dividend however is not a guaranteed payment. Bonds can be issued by both corporations and government and pay out interest which is guaranteed. In the case of bankruptcy of the corporation or government entity, bonds are the safer bet.
Buying a stock means that you are in essence buying a piece of ownership of the company. This allows you special privileges such as voting rights on matters related to the company. The biggest perk of being a stock owner is that you are entitled to a share of the profits of that company. Profits are paid out in payments called dividends and these dividends differ greatly from company to company in terms of payment duration.
Buying a bond means that you are basically buying a piece of the company’s or government institution’s debt. You are not entitled to voting rights similar to the ability of a stock holder, and you are not allowed a share of the company’s or government institution’s profit if there are any.
Making money on a stock depends on the price of the stock which fluctuates depending on its profitability or lack thereof. If a company rakes in a large profit over the course of the year, the shareholders (owners of the stock of that company) in turn will be in line to receive a dividend payout. This works in the case of the company losing money as well, shareholders will also be losing money. In the case of bankruptcy of the corporation, stockholders are last in line to receive money, which usually means they lose most or all of their investment.
Bondholders receive an interest payment at certain intervals depending on the type of bond that was purchased. This payment is made no matter the financial standing of the company (whether it is profitable or losing money). As long as the company is earning enough money to cover its debt obligations that means the bondholder receives the interest payment no matter what. The only negative is that if the company makes a substantial profit, you are not entitled to any additional interest.
It is important to note however, that detailed research should be done before deciding to invest one’s hard earned money into a certain stock or bond.