Last week we started our investment discussion about the different types of investors and the right questions to ask yourself AND the company you are thinking about investing with.
This week, we will look at the differences between stocks and bonds. Keep in mind, both are used by companies to raise money for their businesses, but the difference is one is for ownership of a company (stocks) and the other is loaning money to the company (bonds). With bonds, the company promises to pay a specified amount at the end of a certain time period (maturity).
Let’s start our conversation off with stocks.
Stocks – Ownership:
When you think of stocks, think of ownership, owning a part of a company. Companies offer stocks to investors because this is how they raise capital for their businesses. Think of it like this, the more investors a company has, the less money has to come out of their pockets to fund their venture. Remember when Facebook offered shares of stocks to individuals to purchase for a piece of ownership? When stocks were offered, this gave the public the opportunity to own a piece of Facebook. If a company does well, the stockholders, also known as shareholders OR investors, do well too. This means more money in the investor’s pocket! Investors receive their funds in the form of dividends. If the company has a bad quarter (typically how dividends are paid – every 3 months), the investor most likely will not receive any gains at all! It’s a chance you take when purchasing stocks.
Next up: Bonds
Bonds – Loaning Money:
When you think of bonds, think of a debt that will to be paid to an investor from the company. Usually, the loan is given to the government or other federal and state entities. With bonds, the investor is helping the company raise working capital. Working capital is the difference between a company’s assets and liabilities. In other words, their ability to pay back their debts within a short period of time. They can use the money to fund things like equipment and other major purchases. One form of bonds we are familiar with are savings bonds. Anyone who purchases a savings bond, is actually loaning money to the government! After your purchase, you must hold the bond for at least 1 year before you are eligible to cash it out. Keep in mind, if you buy a savings bond today, and the face amount (amount on the front of the bond) is $100, then you are spending 100 for it. It used to be half the face amount you would pay, but times have changed. Since the government is considered “safe”, you can expect to get your money back with interest. This is why people buy these types of bonds, because they feel it’s less risky.
Note: Investments are NOT guaranteed
Whichever way you decide to invest, make sure you ask yourself, “do I want to own a piece of a company or do I want to have the company pay me back within a certain amount of time, (maturity date)?” It is whatever is comfortable for YOU and no one else.
Hopefully you now have a better understanding about the differences between stocks and bonds, next week, we are going to discuss the types of stocks that are available to investors.
Until next Sunday: Have a blessed week and Happy Belated Mother’s Day 🙂
Changing the lives in our community….one family at a time