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Friday, July 27, 2012

Stocks and Bonds

    There are two ways a business, town or even a country can raise capital without "pulling itself up by the bootstraps": issue stocks(ownership) or bonds(loans).
    An investor owns a part of the business when he purchases its stock. The advantage to the investor is that he shares in the company's profits but can potentially suffer huge losses if the company does not do well. The advantage to the company is that it does not have a loan(bond) it's obligated to pay back but it losses autonomy as it has acquired a shareholder who is part owner of the business.
    A business does not lose it's autonomy when it issues a bond to an investor but it's obligated to purchase the bond back from the investor at a set time with interest tacked onto it regardless of how well the business does; the company has basically acquired a debt. The investor's advantage is the guaranteed income he receives from the purchased bond but he does not share in the company's profits or losses.
    Bonds are generally low risk and is best for the investor who wants secure income and peace of mind. Stocks are generally higher risk and is best for younger investors who can stomach it and potentially make lots of money in the long run or suffer huge losses. A healthy mix of both is best for an investor.

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