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Stocks: Buying Part Ownership in a Corporation

When an investor buys shares of stock, he or she buys part ownership in a corporation. As such, the value of that corporation's stock will tend to reflect the earnings experience of the firm — up during profitable periods and down during periods of loss. Generally speaking, the higher the potential return, the higher the risk. For example, stock investors expect a fairly high rate of return because there is no schedule of repayment and no stated rate of return like that paid by fixed-income securities such as bonds.

Bonds: Making a Loan to a Corporation

Accounting is the measurement, statement, or provision of assurance about financial information primarily used by lenders, managers, investors and other decision makers to make resource allocation decisions between and within companies, organizations, and public agencies. The terms derive from the use of financial accounts. Accounting has been defined by the AICPA as "The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character.

Bonds represent loans made by investors to companies and other entities, such as branches of government, that have issued the bonds to attract capital without giving up managing control. A bondholder, in effect, holds an IOU.

Bondholders do not share in a company's profits. Rather, they receive a fixed return on their investment. This return, stated as an interest rate on the bond, is called the "coupon rate" and is a percentage of the bond's original offering price.

Bonds are issued for specified time periods. When the bond expires and the principal (original investment) is returned, the bond is said to have matured. Bonds can take as long as 30 years to mature. Time to maturity and the issuer's ability to make good on its payment obligations are the two most important factors in choosing individual bonds to purchase.

Every bond carries the risk that a promised payment will not be made in full or on time. As uncertainty of repayment rises, investors demand higher levels of return in exchange for assuming greater risk.

Potential bond buyers can assess an issuer's ability to meet its debt obligations by considering the bond rating assigned by agencies such as Moody's Investors Service or Standard & Poor's. A rating indicating a high likelihood of repayment will allow an issuer to sell its bonds with a lower coupon rate than one that received a poorer rating. 

Bonds, similar to common stocks, fluctuate in market value and, if sold prior to maturity, may produce a gain or a loss in principal value.

Stocks and bonds are two of the most prolific types of securities available on the market. They are basic staples of both small and large investors the world over. But with a myriad of other choices at hand, why do so many investors choose to place their money into these particular instruments? Among the numerous reasons, certainly at or near the top of many lists (whether admitted or not) is that their basic concepts are fairly easy to understand. A stock certificate gets you partial ownership in a company and provides a return on the price you paid for it – hopefully. A bond is simply a loan you make to an entity, and it will also give you a return on your money Stocks and bonds can generally be bought and sold quickly and conveniently.  

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