Prior to investing in stocks as well as actively trading them it is important for you to know what a stock is as well as the basics of exactly how the stock market works. After all, you wouldn’t buy anything else without knowing what it is you are spending your money on!
The word “stock” means or refers to a share of ownership in a company. When you buy a stock you actually become a part owner of that company. You are then a “shareholder” or “stockholder” which is both ways of saying “part owner.” A share of stock does have some cash value. It usually generates dividends for you while the company is in business and also has some value when the company does go out of business and sells off their assets.
Bonds are a type of long-term debt in which the issuing corporation promises to pay the principal amount at a specific date. It is basically a loan that is issued for capital improvements. Bonds pay bondholders interest with most contracts written for a fixed interest every 6 months until the principal is paid on the specific date noted also in the contract.
Pros and Cons for Stocks and Bonds
Stocks and bonds both have a different level of risk and act differently in response to any changes in financial markets. The pros with stocks include having the probability for returns that are higher that with other kinds of investments over the longer term. Some stocks also pay disbursements know as dividends which can pad any drop in the price of shares, offers extra income or to buy more shares. The cons for stocks include prices that can rise and fall radically and there is no certainty of a return.
The pros with bonds include the tendency to fall and rise less radically than stocks which means their prices have less fluctuation. Some bonds can offer a level of stability in income and others such as US Treasuries can offer both liquidity and stability.
The cons of bonds are lower returns long-term than stocks and bond prices falling when interest rates go up. Long-term bonds particularly suffer from the changeability of prices as the interest rates rise and fall.
Stocks in the Primary and Secondary Markets
When a stock is issued to the general public for the first time, it is released through an initial public offering or IPO. The company is issuing the stock with the help of an underwriting firm that helps define the initial offering price as well as timing in bringing the company to market. That is when the stock is offered for sale with the underwriting firm performing as the broker.
Normally an IPO will be conducted by a newer company that wants the funds to undergo a phase of expansion but they may also be issued by older firms that are privately held and wishes to be publicly traded. The IPO for stocks are also referred to as the “primary market.” Anybody buying stock through an IPO must read the prospectus before investing. When the stock starts trading on the stock exchanges; between individual investors or institutions, that’s known as the “secondary market”.