How are Stocks and Bonds Sold
What is a Stock?
A stock is a certificate showing that you own a small portion of a corporation. When you buy a stock, you are paying for a small percentage of all that the corporation owns and you are referred to as shareholder or a stockholder. The advantage of becoming a shareholder is that whenever the corporate profits, you too are profited. The disadvantage is that whenever the company slips down, your share also falls down.
A stock can be purchased at 4 levels. The lowest level stocks are the penny stocks, which belong to small organizations whose chances of hitting big are very rare.
The stocks on the next level are called as growth stocks. These are the stocks belonging to those promising companies whose potential to growth is estimated as high. Growth stocks are not regarded as safe investment tools since growth is only estimated and not a reality.
Secondary public issues are the next level and they are safe investment tools because they are offered by already established businesses.
The next level stocks are the blue-chip stocks and they are regarded as the safest investments one can opt for; however, it takes a lot of time to profit from blue chip stocks.
Stock prices may increase faster, but they also are affected by slightest changes in the economy and slip down as fast as they rise. So investment in stocks should be planned on a long term to taste profit. Also the level of stocks you wish to buy is also an important aspect in investment.
What is a bond?
A bond is an understanding between a company and an individual that the money is lent to the company in exchange for some interest rate. A bond owner cannot claim a portion of a company. He is just a lender and only gets his principal and interest amount.
Usually companies that intend to expand their respective businesses borrow money from individual investors and issue them bonds, which are basically certificates mentioning the predetermined interest rates that are promised to be paid by the company at a later point of time. The period until the promised date is called the maturity period.
Bonds are regarded as safe investment tools for a newbie investor because the initial investment is obtained back and most companies offer good return on investment with their bonds.
Bonds are four types and they are sold through the through corporations and the state, local governments, and foreign governments.
Treasury securities include Treasury Notes (T-Notes), Treasury Bills (T-Bills), and Treasury Bonds (T-Bonds). The US Government supports all these. Only tax is charged on the interest that each bond earns.
Corporate bonds involve companies selling their debts to the public through securities markets. The interest rate offered to these bonds is usually high. They are considered too risky. If the company cannot recover, the bonds become negative.
The state and local governments also sell bonds, which are accompanied with high interest rates. Tax-exempted Municipal Bonds are common State and Local Government Bonds.
Companies are given credit ratings by some accredited agencies, which determine the credibility of companies in terms of paying back the principal amounts of the bonds. The credit ratings are given on a scale of AAA to D with companies having higher credit ratings considered as safer to invest in.
Bonds are sold in open market. The value of the bonds would vary depending on the interest rates in the general economy of the country.
Both bonds and stocks are traded over-the-counter in security firms in the open market scenario. The stock exchange is also used for trading, which enables stockbrokers to sell pre-owned bonds.
Stocks are also traded in an open market scenario but the selling is done through stock broking agencies that ask for commission or a transaction fee for their service.
There are 2 types of brokers: the full service brokers and discount brokers. While the full service brokers offer portfolio management, financial investment strategies and general investment advices and tips, the discount brokers handle your specific questions on investment. They are not equipped to provide customer service that the full service brokers offer.
Based on an individual's needs and financial capabilities, one can choose between a full service broker and a discount broker to trade stocks.
