Stocks-and-Bonds.docx

StocksandBondsSomepeoplearccontenttolimit(heirinvestmentprogramstosuchsafeinvcsnwn<sassavingsaccountsandsavingsbonds.Theytakecomfortinknowing(hatwhile<hereturnfromsuchinvesimencsmaybesmall,itisSleadyandsure.OtherpeopleseekinvestmentsIhalinvolvehigherrisks.TheyunderstandthattheamxntofmoneyaninveMnenlreturnsisfrequentlyrelatedIotheamountofriskitinvolves.Becausetheywanttoobtainthegreatestpossiblereturnoneachdollarinvested,theyarcwillingtotakecertainchances.StillanothergroupCfpeoplewantb<xhthecomtbrtofsafeinvestmentsandthegreaterdollarreturnofhigh-riskinvestne11s.Accordingly,(heypreferaprogramthathasabalanceofbothsafeandhigh-riskinves(ne11s.Forthelasttwogroups,themostpopulartypesofhigh-riskinvestmentsareth>sethatinvolvesecurities.Securities,whichisageneraltc11nforstocksandbonds,arcsoldbygovernmentsandcorporationsinordertoraiselargeamountsofmoney.TherearcthreewaysinWhiChbusinessesthatneedagreatdealofmoneyforalongperiodoftimecanobtainthatmoney.Theycango(oabankandapplyforalong-termloan.Theycanusethexofisof(hebusiness.ButbanksareoftenreluctantolendlargeamountsforperiodslongerthanOnCOrtwoyean>.AndprofitsarcordinarilynollareenoughlGnancenylhingveryexpensive.IhcrcforcwheneverbusinessesorgovernmentsneedfinancingformajorprojectsOrforgrowththeymustraisethemoneythroughthesaleofsecurities.BondsAbondislikeapromissorynote.CXCCp<thatitisissuedeitherbyabusinessorbygovemnenlunitsuchasacity,cnly.orstate.Whcyyoubuyabond,youarcreallylendingmoneytothegovernmentOrbusinessfromwhichyoubuyit.Inreturn,youreceivefromthesellerawrittenpromisecopayyouadefinitesumofmoney,plusinterest,atafuturedate.ThereareIWotypesofbonds.Governmentbondsareissuedbystateandlocalgovernn>e11s(ohelpPayforimprovementssuchasStrcclS.schools,andpublicbuildings.CorporatebondsareissuedbybusinessesIoraisemoneyforexpansionandgrowth.ThCdenominationisthesumofmoneythatthebondrepresents.Thissumisprintedonthebond.hcinterestrateissetatthetimeabondisissued.Itremainsthesameuntilthebondmatures.Thematuritydateofabondisalsofixed.Bondsmaybeissuedforsuchperiodsas10,20.or30years.SupposeyouboughtaS1.0(K)bondal6percentinterestfor20years.Eachyearyouwouldreceive$60ininlereM(6percentofS1.(XM).Ihcinterestwouldprobablybepaidtoyouintwopayments.$3()everysixmonths.After20years,thebondwouldmature,andyouwouldreceive$I,(XM>-(hepriceyoupaidwhenyoufirstboughtthehood.BondsmaybeeitherregisteredOfbearerbonds.AregisteredbondisabondIhalhasthenaneof(beownerrecordedwiththeissueroflhebond.Interestismaileddirecllyl(hepersonregisteredastheowner.Abearerbondis<bondwhoseownerispresumedtobethepersonwhohaspossessionofthebond.Bearerbondsarcnotregistered.Wheninterestpaymentsarcdueonabearerbond,itspossessorclipsacouponfromlhebondarxisends(heC(MlPOntolheissuerforpayment.Bondsan?alsoclassifiedaccording(o(hetypeofsecurity(hatbacksthemup.Amortgagebondisbackedby(heissuer'spledgeofbuildings,landandequiprncnlas火Curhy.Adebenturebondisbackedonlybytheissuer'spromiselopaywhen(heinlerestandprincipalarcdue.1. ACCordingto(he(ex(.whichisconsideredthesafestprogramofinvestment?Saving2. Theessentia)differencebetweenaregisteredbondandabearerbondliesinIhal.3. Intermsofsafeness,amortgagebondis-saicrthanadebenturebond.4. WhichcanNOTbeafeatureofabond,?5. Wecaninferfromthepassagethatthesafestformofbond,inheory,is-governn>eHbondwithmongage_.StocksAsabondholderyouarcacreditorof,orlenderto,abusinessfirmorgovernnnunit.Asastockholder,however,youarconeof(heownersofacorporation.StockrepresentsaShanJofownershipinacorporation.Astockholdernayownoneshareormanysharesofacorporation*sslock,andeachshare11uycostseveraldollars>rseveralhundreddollars.Uponpurchaseofastock,astockholderreceivesastockcertificate,aprintedtb11nthatstatesthenumberofsharesapersonownsinacorporation.Ybucanbuyeithercommonorpreferredstock.Comnonstockisstock(hatpennitsownersovo<efordirectorsa(heannualmeetingoftheCOrPOraUonandtoshareanyprofitsorlosses.Ho)den>ofcommonstockshareindirectlyinthemanagementofthecorporationbyvolingforthedirccu>n;.whoinIumappointsthepeoplewhomanagethecorporation.AlthoughthereisgreaterriskinowningcommonStOCkthaninowningpreferredstockorbonds、thereisalsothechanceofagreaterreturnonyourinvestment.Dividendsforcommonstockarcsetbythedirectorsof(hecorporationaccordingloIheamountofx>fit.Ifprofitsarehigh,dividendsofCommOnstockcanbemuchhigherthanforpreferredslock.Ifprofitsarelow.dividendsmanynotpaidIoholdersofcommonsslock.Forthisreason(heprice>fsharesofcommonstockchangesmorerapidlythanthepriceofpreferredstock.PreferredMockisstockwithfirstclaimonthecorporalion,searningsandassetsaftertheclaimsOfbondbokiCrs.PrCfCrrCdstockholdersdonothavevotingrightsinthecorporation.Prefen,e<lstockdividendsareusuallysetWhelIlhestockisfirstsoldandNmain(hesamethereafter.Thismeansthatifthedividendisseiat$6pershare,preferredstockholderswillusuallyreceivethissanamounteachyear.PreferredstockdividendsmustbepaidbeforeCommonStoCkdividendscanbepaid.Sincethedividendremainsthesamefromyeartoyear,preferredstockisusuallymorestableinpricechancommonstock.Bondsareamoresecureim,esmemthanslockbecauseabondholderhasfistclaimon(heassetsofaCoqX)raUon.Thismeans(halacx)ralionmustfirslpayinlercstl>bondholder;.ThenSlOCkholdersarcpaidtheirinterest.Ilalsomeansthatifac。TPonHiongoesbankrupt,thebondholdershavefi11itclaimontheassets.Shouldacompanyfails,itsnetassetsarcdividedfirstamongthebondholders,thenamong(heprefe11cdstockholders,andfinallyamongthecommonstockholders.6. Preferredstockdiffersfromcommonslockessentiallyinthat.7. WhenaCOrPorationgoCSbankruptorfails,thesequenceofclaimonitsassetsornetassetsshouldbebondholders,preferredstockholders,commonMockholdcrs.8. Bondsdifferfromstocksessentiallyinthat.BuyingandSellingSecuritiesSecuritiesarcgenerallyboughtandsoldthroughinvestmentbrokers.Theinvestmentbrokerishcagentwhoprocessesordersforinvestorswhowanttobuyorsellsecurities.BrOkerSusuallybuyandsellstocksthroughastockexchange,whichisIheCeInralmarket!rsecurities.Thereanrabout20oftheseexchangesIhroughoultheUnitedStales.ThetwomajorexchangesaretheNewYorkStockExchange(NYSE)andtheAmericanStockExchange,bothlocatedinNewYork.Onlybrokerswhosefirmsarcmembersofanexchangemaybuyorsellthroughthatexchange.Thebrokerreceivesacommissionforhisorherservices.Thecommissionisaerentageof(heamou11ofthesale.Whensecuritiesarfirstissued,(heyaresoldatafixedprice.Oncetheyaresold,however.Ihcpricechangesgreatly.SonietiniesIhepriceschangedaylday.dependingonsupplyanddemand.TheStockMarketCorporationsissueonlyalini(ednumberofsharesofsock.After(hosesharesan?PUlChaSedtheyInaybetraded.Thismeans(hatpeoplebuyandselltheshares.Whenyoubuystuck,youcanneverbesureyouwillgelbackWhMyoupaid!>rit.Thepriceofastock,likethepriceofmostothergoodsandservices,dependsonhowmuchbuyersarcwillingtopay.Thepriceabuyeriswillingtopaydependsonanumberoffactors.AmOngthemarcthese: ,Ihcgeneraleconomicoutlocwillinfluencethepriceofstock.Whentheoutlookisgcxlmorepeoplewillwanttobuysuxrk.Thismeansthereism>rcdemandforslock,andslockpriceswillgoup.WhenIhCeconomicOUuookispoor,thenthedemandforStoCkdrops,andpriceswillgodown. Acorporation,searningswillaffcx(thepriceofitsslock.Usually.Ihegreatertheearnings,thegreaterlhcdividendsacoro11i(ionwillpay.Whencorx>ra(eearningsarehigh,<hestockisindemand,andpricesgoup. Buyersoftenborrowmoneytobuystocks.Ifimcrcstralesforborrowingarchigh,peopledonotborrowanddono<buystock.Becausethedemandislow.stockpricesgodown.Eachdaystransactionforstockslistedonthemajorstockexchangesarcrecordedandpublishedinthedailynewspapers.IfyouwanttoknowthePriCeofastock,yocanlookinthefinancialsectionofyourlocalnewspaper.9. Inthefinalanalysis,(hedecisivefactor(hataIYeclsthemarketpriceofslockis.10. AllofthefollowingstatementsarctrueEXCEP,that.TheBondMarketAbondholdermaysellabondbeforeitsmaUrilydate.Bondprices,likeSUKkprices,dependonhowmuchpeoplearcwillingtopay.However,bondpricesdonotchangeasmuchfromdaytodayasStoCkprices.Oneofthefactorsthatinfluencebondpricesisthechangeofinterestratesintheeconomy.Forexample,supposeyouhough(a$1,000bondfiveyearsagoatafixedrateof5percenti11eres.YdurbondwouldpayS50ayearininterest.However,supposeIhaMhiSyear(heinterestrateonloanedmoneyis8PeroelN.A$1,000bondPUIrhi1.SedthisyearWoUkIhaveafixedinterestrateof8perventandwouldpay$80ayearininlereM.Ifyouwantedtosellyourbondthisyear,nobuyerwouldbewillingtopayS1.(XX)forit.WithaCUlTCntearninginterestrateof8percent,thebuyerwouldlosemoneyinbuyingyourbondfor$1,000.Tosellyourbondonthebondmarket,youwouldhavetosellforlessthan$1,000.OntheOlherhand,ifinterestralesintheeconomyhaddroppedbelow5percent,buyersIlIiglNbewillingopayInorethan$1,000foritbecauseithasafixedruleofinterestof5percent.AnotherfactorthataiYcctsthepriceofbondsisthecreditratingofthecompanyorgovernmentunitissuingthebond.IfthecreditratingofChccompanychangesduringthelifeofthebond,thepriceofthebondwillchange.Whenhccreditratinggoesdown,(hepriceof(hebondmaygodownalso.Corporateandgovemnenlbondpricesarvquotedinthefinancialpagesofnewspapers,likeSkxrkprices.Thequotesshowthematuritydateandtheinterestraleofthebondandgivethemarketpriceofthebondthatday.Bondpricesarcgiveninvalueper$1(X).Apricequexedas',95,meansthatyoucouldget$95Ofbra$1,000bond.ConsiderationsBeforeInvestinginSecuritiesSecunliesarenolforamateurs.Thesecuritiesmarketisfullofrisksfor(hesmallinvestorbecauseknowingwhatstocktobuy.whentobuy.andwhentosellarcdif11cultdecisions.Mostinvestorsdonohavetimetodothencccssarj,researchtomakewisedecisions.Theyrelyonguessworkandarcoftenwrong.However,therearcseveralthingstokeepinmindifyouarcinterestedinbuyingsecurities. Besureyoucanaffordtherisk.Askyourselfthreequestions:Iflmaketheinvestment,will1haveenoughmoneytomeetanyemergencythatmayarise?Can1stillcovernormallivingexpenses?Can1affordtoIOSCall1invest?Onccyoubuysecurities,youshouldnothavelosell(hemtocoveryourday-t(kylivingexpensesortomeetunexpectedemergencies. 1.imittheriskyoucake.Dolrtinvestonthebasisoftipsorrumors.Alltoooftentheyarcwrong.Remember,thereisriskinanyinvestment,andonlyyoucandecidehowmuchriskyoushouldassume.EoreverypersonWbOhasmademoneyonarum<H,(hereareprobablytenpersonswhohavelostmoney. Gelexpertadvice.Aqualifiedinvcs(nwnlbrokercanhelpyoudecidewhichsecuritiesmighlbelstforyou.Thebrokerwillalsobegladtohelpyoulearnmoreabout(heOPCnHionof(hestockmarket.BnAcragefirmsSonwlin心haveresearchdepartmentsandlibrariestoaidtheinvestorIfnot.thebrokercantellyouwhereyoucangetinformationabout(hemarket.Study(hematerialsfarmyourbrokeraswellasfinancialmagazinesandthefinancialsectionofyourdailynewspaper.Whenyouareadycobuy,placeyourOnIerthroughyourbroker.11. WhichisusuallyNOTafactorthataffectsthepriceofabond?12. OftheIbllowing.arcnormallyNoTconsideredakindofsecurities.13. ThequotesofabondgenerallyshowallofthefollowingEXCEPT.MutualFundsYoumaywanttoconsidereithermutualfundsorsomeothermethodsofinvestinginvariousslockstodecreasetheriskoflosingallyouinvest.Whenyouinvestyourmoney,thesaying"DorTtputallyoureggsinonebasket*hasmerit.ByinvestingintheStoCkofseveralcompanies,(hcrcislesschanceoflosingall(hefundsyouhaveinvested.Onewayofdoingthisittbuymutualfundshares.Amutualfundisacofx>ration(hatsellsitsownstocksandusesIheInoneyIOinvestinothercorporations.Youbuysharesinamutualfund,andy>urmoneyisus<xlbythemutualfundcompanytoinvestinseveralsecurities.Becausetheyarclae.mullfundcompaniescanemployinvestmentanalystswhostudythemarketcarefully.FOrthisreason,mutualFundsarcpreferredbymanysmallinvestorswhoarcnotablecomanage(heirowninvestmentseffectively.Themutualfurulinvestorreceivesdividendsonmutualfundshares.Mostmutualfundschargeafeefor(heirservices.14. WhatshouldNOTaninvestordoinordertobesuccessfulinbuyingsccurilies?15. Manysmallinvestorsprefermutualfundsbecause.