What to Know about Stocks and Bonds
Everyone talks about stocks and bonds. But what are they, how do they differ from each other, and is one better than the other?
While it can seem like comparing apples to oranges, they’re both forms of investing in your future. The one to pick depends on when you plan on cashing out of those investments.
Here’s what you need to know.
If you’ve heard of investing, you’ve heard of stocks. In fact, even if you don’t pay attention to finances in general, you’ve still heard about the stock market and when it goes up or down. Stocks have great potential for success, as well as great risk of failure, depending on the type of stock you buy.
A Piece of the Company
Buying a stock is essentially owning a piece of a company. You won’t literally own a brick or two of the physical location of the company. But the value of your stock will go up and down in correlation with the performance of the company and overall economy.
Depending on how many stocks you own in a particular company, you may have more influence on the direction of the business during stockholder meetings. However, most people won’t reach 1% of stock in any company.
Variety and Flexibility
Stocks come in all varieties and prices. They can be sold or exchanged at any time without incurring a fee, as long as you purchase them on a free trading platform. Sometimes removing funds from an investment account can incur a penalty of fee. However, if you feel like you want to divest in a particular stock, you do have that option.
Not all stocks need to be sold in order to make money off of them.
- Some stocks may offer a quarterly dividend, which is a small payment to the stockholders.
- Some have fixed dividends that will consistently pay their stockholders regardless of profit, which can be beneficial for stability and planning.
- Others work on variable dividends, so that you can profit from their success as it comes around. However, it means you can lose out on possible dividends during rough patches.
Bonds are more static than stocks. While a stock is considered ownership over a piece of a business, a bond is a loan made by an individual to the government or a corporation.
Bonds can be bought or sold from other investors, often based on the face value of the bond. Face value is the amount that will be paid upon maturity of the bond.
Coupon Rates and Dates
A coupon rate is the percentage of interest paid on the value of the bond. By extension, the coupon date is the day at which the interest is paid. Higher coupon rates are typically the trade-off for high risk of default bonds. A low coupon rate comes with lower risk, but also a lower payout.