Among the many investments available for your portfolio, two of the most popular types are common stocks and bonds. Investors purchase bonds intending to earn regular income and invest in stocks that hold potential for long-term growth. In addition, some stocks pay regular dividends to investors. Each type of investment has distinguishing characteristics to consider prior to purchasing.
Stocks Represent Ownership
Shares of common stocks represent ownership in the company. One share represents a fractional ownership depending on the number of shares outstanding. In simplified terms, if a company issues 100 shares of stock and an investor purchases 10 shares, she would own 10 percent of the company. Real-world corporations issue millions, often billions of shares. However, each one represents a proportional share of the equity in the company.
Attached voting privileges are a characteristic of most common stocks. Shareholders elect directors, who in turn choose managers who are responsible for the direction of the business. Often, if a corporation is involved in a merger or acquisition, shareholders express opinions on the deals by exercising voting privileges.
Common Stock Value
Hypothetically, the value of stocks has no ceiling. Conversely, the value of a company's stock shares can fall to zero, making the shares worthless. One attractive characteristic of common stocks is the dividend payment. Many companies pay earnings to stockholders in regular dividends. This represents the owner's share of profits earned. In the event a company must liquidate or file bankruptcy, the owners receive only what is left over, if anything, after the company pays creditors and bondholders.
Common Bond Characteristics
Corporations, government agencies, and municipalities issue common bonds that represent loans the bondholders make to a company or organization. The contract accompanying a bond issue details the obligations of the issuer to bondholders and outlines the particular characteristics of the issue, such as the rate of interest.
Convertible and Callable
Some corporate bonds may have a conversion provision that permits the bondholder to exchange the bond for a specified number of shares of the company's stock. A bond may also be callable, meaning the issuer can force the bondholder to redeem before the maturity date.
Bond Rates, Maturity and Value
Bond investors do not receive dividends in the form of company earnings, but instead earn a fixed return, called the coupon rate. Bonds have an expiration date, in investor words, a maturity date when the principal is returned to the investor. The principal is based on the par, or face value of the bond. Bond values are generally known beforehand when calculating future interest rate payments. However, bond values are subject to credit risk based on the financial condition of the issuer and affected by inflation and market interest rates.
- Investment Analysis and Portfolio Management; Frank K. Reilly and Keith C. Brown
- Mount Holyoke College: Common Stock
- Sacramento State: Chapter 7 - Bonds and Bond Valuation
- U.S. Securities and Exchange Commission: Stocks and Bonds - And the Winner Is . . .
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