Financial Investments: Stocks, Bonds and Mutual Funds
If you wish to invest in the stock market, you have to know a little about what you are doing. When a company goes public, they started to sell their shares of stock on a public stock exchange like the New York Stock Exchange (NYSE). One share of stock has a cost which constantly varies regularly. Your aim is to purchase a share of stock at one price, and then sell the share at a higher price on a later date.
Purchasing a share of stock means you own part of the company. The firm gives out stock in order to raise money for their company to expand. If you own stock, you are a shareholder. As a shareholder, you are able to vote in the company and have some say. Although, generally you just vote on who you want to be on the board of directors, and they make decisions for the firm.
A stock is considered to be an equity security because you own part of the company. A bond is considered a debt security because you lend the company money, you don’t own any of it. You can purchase bonds from the government, state, bank, or a corporation. If you purchase a bond for $1,000 that matures in 10 years with an efficient interest rate of 5% paid annually, every year you will receive $50 until the 10 years are up at which time they will pay you back the $1,000.
The interested individuals can hold bonds up to its maturity or you can buy and sell them. Bonds bought from the government generally have little to no risk. Corporate and municipal bonds have a rating that will tell you how dangerous they are. For example, an AAA bond has very little risk, but will generally not give you a very high return. A bond that is rated at BB or lower is considered to be a junk bond as it involves a higher risk.
A mutual fund is a mix of stocks, bonds, or both. You provide your money to a mutual fund manager who pools your money in with other people’s money. He buys stocks or bonds that he feels will get a high return. Mutual funds are advantageous because you are able to expand your money, as you can trim down your risk by investing in many different securities or investments.