There are so many complex issues and constant change in our business of
financial planning and investment management, that we often forget some of the
basic questions that many people have, such as what a Stock, Bond or Mutual
Fund is? I will attempt to answer these questions at a very basic level below.
A share of stock is, at its most basic level, the representation of
ownership of a corporation that is a claim on the corporation's earnings and
assets. There are several different types of stock shares. Common Stock usually
entitles the shareholder to vote in the election of directors and other matters
taken up at shareholder meetings or by proxy. Preferred stock generally does
not confer voting rights but it has a prior claim on assets and earnings -- dividends,
which are the distribution of company earnings to shareholders, must be paid on
preferred stock before any can be paid on common stock. In addition, a
corporation can authorize additional classes of stock, each with its own set of
contractual rights. Shares of stock may be privately or publicly held. Publicly
held shares must go through a regulated registration and underwriting process
and can then be purchased and traded by the public. Investors make money
investing in stocks by collecting or reinvesting any dividends issued by the
corporation, and if the share price appreciates to more than the price they
paid for the shares. They will lose money if the share price of the stock
depreciates lower than the cost at which they purchased it plus any dividends
received.
A bond, at its most basic level, is a loan between an entity such as
governments and corporations and an investor who purchased the bond. A bond can be any interest-bearing or
discounted (which means that the investor would pay less for the bond today and
receive a greater amount when the bond issuing entity pays off the loan)
security that obligates the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Bond holders have an IOU from the issuer, but no ownership
privileges, as stockholders do. Investors make money on a bond investment by
collecting the interest and holding the bond to maturity or selling the bond
prior to maturity for a price which is greater than what they paid for the bond
originally.
A mutual fund is operated by an investment company that raises money from
shareholders and invest it in multiple securities such as stocks, bonds,
options, futures, currencies, or money market securities. These funds offer the
investor diversification and professional money management for a fee. Mutual
funds come in many different varieties. Some invest aggressively for capital
appreciation, while other are conservative and are designed to generate income
for shareholders.
Investors need to assess their tolerance for risk before they decide
which stock, bond or mutual fund would be appropriate for them. In addition,
the timing of buying or selling these securities depends on the economy, the
state of the stock and bond markets, interest rates and other factors and past
performance is no guarantee of future results.
White House Financial & Settlement Consulting helps families live an easier and less stressful life through the proper management of their financial resources. We do this by acting as our clients’ trusted advisor providing a personal touch customized to the client’s needs! Please visit our web site at www.whitehousellc.com for more information!
White House Financial & Settlement Consulting helps families live an easier and less stressful life through the proper management of their financial resources. We do this by acting as our clients’ trusted advisor providing a personal touch customized to the client’s needs! Please visit our web site at www.whitehousellc.com for more information!