Stocks and Bonds

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In the financial markets, the most common forms of marketable securities are stocks and bonds. Though they have some similarities to each other, they differ greatly in many aspects. Broadly speaking, both financial instruments enable one to invest in corporations, public and/or private, with possible profitable returns in the future. Stocks (or shares), by definition, are shares of ownership in a company. By purchasing stocks in a company, the investor becomes a part owner, and thereby owns a percentage share of the company’s after tax profits. Stocks/shares have two key characteristics: 1) they can be issued in small denominations: an investor can purchase as many or as few shares in a company as he/ she wants, thereby becoming a stockholder in that company and 2) they are transferable, which allows the investor to sell the stocks that he owns to someone else, generally through a stock exchange. Stockholders, by right of being part owner, have the power to elect the board of directors, and in addition, remove senior level managers or directors, who they feel are performing poorly. Though they are part owners, stockholders have limited liability with regard to any losses that the company may incur. Under all circumstances, any shareholder can only lose as much as he/ she had initially invested to purchase the stock. Stockholders invest in stocks to gain from 1) dividends that the company declares from time to time and 2) appreciation in the trading price of the stock on the stock exchanges. Dividends declared by companies are by no means fixed or predictable, and depend among other things, on the distributable profits of the company. Stock prices are primarily affected by the profitability of a company, the dividend yields of a company (rise in dividend yields give rise to higher stock prices), general market conditions (a bull market will produce higher stock prices, and vice-versa in bear markets), and interest rates (rising interest rates generally correlate...
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