Stocks and Bonds and Business Investing
Holding an interest, or a stake, in a company is a risky proposition because although it presents an opportunity for passive income and equity appreciation, the company may not always turn a profit and may lose value or even collapse. Called investing, the purchase of ownership in a company can be very expensive for the average individual. To this extent, public companies traded on a stock exchange offer an alternative means of investing by issuing equity in the form of stock and debt in the form of bonds.
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Investing
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Investing is the process by which an entity or individual purchases some form of property based on the conviction that its value and revenue will offer them a source of income. Such property may include, but is not limited to. commercial and residential real estate, the equity of public and private companies, and loans. The income and value appreciation earned from investment property is called the return on investment.
Stock
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Those who own all or part of a company are said to hold equity in that company. Private companies, both large and small, that are not traded on a stock exchange (e.g., the New York Stock Exchange) may be owned by a single individual or by several individuals. Partial ownership of public companies is possible through purchasing stock. Public companies divide their total equity into discrete units called shares.
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Shares
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A share of a public company's stock serves numerous functions. Shares quantitatively measure a given party's total equity in the issuer, since greater ownership is associated with higher numbers of shares held. The market price of a company's stock is expressed on a per-share basis, as are income (dividend) amounts and, in the case of ordinary shares, the rights of holders to vote on decisions affecting the direction of the company.
Loans
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A loan is a sum of money typically granted by a bank to a borrowing party. In return, the borrower pledges to repay the lender, or creditor, the amount of the loan (principal) as well as accrued interest within a predetermined time frame. Though not considered an investment because there is no purchase of property involved, loans provide lenders with interest income for a certain time. If repaid successfully, lenders may use the money that was loaned initially in order to grant another loan.
Bonds
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Public companies often prefer to borrow money in order to finance projects and expansions. For this reason, companies issue bonds in addition to shares of stock. A bond is a loan granted by the buyer to the issuing company. The amount, or par value, of the bond represents the principal. The company pledges to make periodic, or coupon, payments of interest over a specific span of time, or maturity period. At the time the bond matures, the company also returns the bond's par value to the holder.
Stocks vs. Bonds
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In terms of investment income, stocks and bonds differ mainly in their levels of risk and return. Of the two, stocks carry higher risk and may experience inconsistent fluctuations in value and dividend payments. For this reason, stocks are viewed by many as a viable investment when held over several years. By contrast, bonds have a definite life span, but bear substantially less risk. Bonds offer consistent, timely interest income payments with a return of the par value. For this reason, bonds are recommended for more risk-averse investors.
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