Bonds

Setting Investment Goals

Investing is using money to participate in an enterprise that offers the possibility of profit.
It usually involves careful planning and goal setting.
There are two goals that everyone should set before starting to invest.
- First, you should limit your credit card charges and reduce or eliminate credit card debt.
- Second, start an emergency fund and add to it as your income increases.
  - It is recommended that people save enough money to cover at least six months of expenses.
Once you achieve these two goals, start looking at the different investment options that are available to you.
It is a good idea to meet with a financial adviser annually to review your portfolio and goals.
Investment options include securities.
- A security is a tradable document that shows evidence of debt or ownership.
  - Securities include bonds, shares of stock and mutual funds, and stock options.
The return on an investment is the amount of money the investment earns, or the yield.

Investing in Bonds

When corporations or governments need to borrow large amounts of money, they often issue bonds.
- A bond is a certificate issued by a government or company in which it promises to pay back borrowed money at a fixed rate of interest on a specified date (the maturity date)
Investing in bonds is similar to putting money into a savings account.
The rate of interest on a bond is referred to as the coupon rate.
- This rate is also referred to as the yield.
Interest is usually paid once or twice a year.
Bonds may be sold at a discount, or below their face value.
- Face value is the value of a security that is set by the company or government that is issuing it.
The difference between the amount you pay for the bond and its face value is the bond discount.
There are two types of bonds you can buy: government bonds and corporate bonds.

Government and Corporate Bonds and Securities

Federal, state, and local governments issue bonds to help raise the money to fund their regular activities.
The interest paid on a bond can be higher than the interest paid on a savings account.
The U.S. Treasury Department issues four basic types of securities: Treasury bills (or T-bills), notes, bonds, and savings bonds.
Investors can buy these securities through banks or brokerages, which charge a commission
Treasury bills are sold in units of $1,000.
- They may reach maturity in four, 13, or 26 weeks.
- T-bills are discounted securities, which means the purchase price that investors pay is less than the face value of the T-bill.
- On the maturity date, the investor receives the full face value of the T-bill.
Treasury notes are issued in $1,000 units, with a maturity of between two and 10 years.
Treasury bonds are issued in $1,000 units, with a maturity of 30 years.
Generally, the interest rates on notes and bonds are higher than on T-bills because of the increased risk of the rates rising or falling during the length of time until the note or bond matures.
Savings bonds are registered bonds that are sold in denominations of $50 to $10,000.
- They allow people to earn interest on the savings they entrust to the government in exchange for the bond.
A Series EE savings certificate costs half the amount of its face value to buy
- After a certain number of years, it becomes worth its full face value.
Another type of savings bond is the Series I bond.
- Investors pay the face value for Series I bonds.
- The interest rate on this bond fluctuates with the rate of inflation over time
EE bonds and I bonds are attractive to people who want safe, guaranteed long-term investments.
Besides the securities issued by the Treasury Department, bonds are issued by other federal agencies as well.
- However, they offer a slightly higher interest rate than treasury securities.
- Their maturities range from one to 30 years, with an average life of about 12 years.
- Generally, their minimum denomination is $25,000.
Local and state governments issue municipal bonds.
- Municipal bonds are sold to finance city, town, or regional projects such as schools, highways, and airports.
  - You can buy them from a broker or directly from the government that issued them.
Bonds issued by corporations are called corporate bonds.
- Corporate bonds can be bought and sold through brokerage firms.
  - They are usually used to finance construction and equipment.
The value of a corporate bond fluctuates according to the overall interest rates in the economy.

Advantages and Disadvantages of Buying Bonds

Bonds have many of the same advantages and disadvantages as savings accounts.
One advantage is that most bonds are secure, especially those from government and large, established businesses.
In particular, bonds and other securities issued by the U.S. government enjoy the full faith and credit of the federal government.
Bonds also pay interest.
Although they are liquid, one disadvantage of bonds is that an investor can lose money if a bond is sold or redeemed before it matures.
Most bonds are written for a minimum of $1,000, which may make them out of reach for some investors.
Like savings accounts, bonds may not keep up with inflation

Stocks

Investing in Stocks

A stock is a share of ownership in a corporation.
When you buy stock, you receive a stock certificate that indicates ownership in a corporation.
Stock prices may change throughout the day, every business day.
- There is no promise that a stockholder will get his or her money back or that he or she will receive income from owning stock.
- Therefore, stocks are generally more risky than bonds.
Companies that sell stock must follow rules set up by the Securities and Exchange Commission, or SEC.
- The SEC is a U.S. government agency that supervises the exchange of securities to protect investors from wrongdoing.
The amount of money the stock earns depends on its type of return and rate of return.
There are two ways that you can receive a return on stocks.
- One is through the payment of dividends, which is a share of profits given to stockholders.
  - Dividends are usually paid quarterly in cash or in more shares of stock.
- Many stockholders receive a return on stock when they sell it.
  - Selling stock for more than you paid for it results in a capital gain.
    - A capital gain is a profit made from the sale of a financial asset such as stock or a bond.
    - A capital loss is an amount lost when an asset is sold for less than its cost.
The rate of return on stocks is always expressed as a percentage of the original investment and figured on an annual basis.
When a company sells stock, it usually offers two different types.
- Common stock is stock that provides the most basic form of corporate ownership.
- Preferred stock is stock that gives the owner the advantage of receiving cash dividends before common stockholders receive any.
A dividend does not have to be paid each year.
Stocks carry different levels of risk.
- Blue-chip stocks are stocks in large, well-established companies that have a good track record of success and profitability.
- Speculative stocks are stocks in new firms without an established track record.
A stockbroker is a person who buys and sells stocks, bonds, and other securities for clients.
- Stockbrokers act as a link between buyers and sellers.
- As a fee for their services, stockbrokers charge a commission, which is either a percentage of the value of the stock or a set amount for each transaction.
Many people lower their investment fees by buying and selling securities using the Internet.
Most stocks are bought and sold through a trading market known as a stock exchange.
- A stock exchange is an organized market for buying and selling financial securities.
- Some of the best-known exchanges are the New York Stock Exchange (NYSE®) and the American Stock Exchange (Amex®).
Over-the-counter securities are not listed or sold through stock exchanges.
- They are traded directly between buyers and sellers in person or via computer.
- The NASDAQ is an electronic stock market system that quotes over-the-counter securities.
Mutual funds lessen the risk of investing in the stock market.
- A mutual fund is a fund created by an investment firm that raises money from many shareholders and invests it in a variety of stocks or other investments.
Most people who are investing for retirement will own individual stocks or bonds for a number of years.
Long holding periods are an excellent way to build wealth while minimizing risk.

Advantages and Disadvantages of Stocks

A general principle when investing is that the greater the risk, the greater the possibility of a larger return.
A major disadvantage of stocks is that you have more risk of losing your investment when putting money into them rather than a savings account or bonds.
However, a big advantage of stocks is that long- term comparisons of returns on stocks and returns from savings accounts or bonds show stocks do better over time.
If a company declares bankruptcy, its stockholders may receive little or none of their investment back.
Liquidity refers to how easily an investment can be turned into cash.
- Most stocks can quickly be turned into cash by selling them.

Home

Business

Finance

Chapter 31: Investing

Bonds

Setting Investment Goals

Investing is using money to participate in an enterprise that offers the possibility of profit.
It usually involves careful planning and goal setting.
There are two goals that everyone should set before starting to invest.
- First, you should limit your credit card charges and reduce or eliminate credit card debt.
- Second, start an emergency fund and add to it as your income increases.
  - It is recommended that people save enough money to cover at least six months of expenses.
Once you achieve these two goals, start looking at the different investment options that are available to you.
It is a good idea to meet with a financial adviser annually to review your portfolio and goals.
Investment options include securities.
- A security is a tradable document that shows evidence of debt or ownership.
  - Securities include bonds, shares of stock and mutual funds, and stock options.
The return on an investment is the amount of money the investment earns, or the yield.

Investing in Bonds

When corporations or governments need to borrow large amounts of money, they often issue bonds.
- A bond is a certificate issued by a government or company in which it promises to pay back borrowed money at a fixed rate of interest on a specified date (the maturity date)
Investing in bonds is similar to putting money into a savings account.
The rate of interest on a bond is referred to as the coupon rate.
- This rate is also referred to as the yield.
Interest is usually paid once or twice a year.
Bonds may be sold at a discount, or below their face value.
- Face value is the value of a security that is set by the company or government that is issuing it.
The difference between the amount you pay for the bond and its face value is the bond discount.
There are two types of bonds you can buy: government bonds and corporate bonds.

Government and Corporate Bonds and Securities

Federal, state, and local governments issue bonds to help raise the money to fund their regular activities.
The interest paid on a bond can be higher than the interest paid on a savings account.
The U.S. Treasury Department issues four basic types of securities: Treasury bills (or T-bills), notes, bonds, and savings bonds.
Investors can buy these securities through banks or brokerages, which charge a commission
Treasury bills are sold in units of $1,000.
- They may reach maturity in four, 13, or 26 weeks.
- T-bills are discounted securities, which means the purchase price that investors pay is less than the face value of the T-bill.
- On the maturity date, the investor receives the full face value of the T-bill.
Treasury notes are issued in $1,000 units, with a maturity of between two and 10 years.
Treasury bonds are issued in $1,000 units, with a maturity of 30 years.
Generally, the interest rates on notes and bonds are higher than on T-bills because of the increased risk of the rates rising or falling during the length of time until the note or bond matures.
Savings bonds are registered bonds that are sold in denominations of $50 to $10,000.
- They allow people to earn interest on the savings they entrust to the government in exchange for the bond.
A Series EE savings certificate costs half the amount of its face value to buy
- After a certain number of years, it becomes worth its full face value.
Another type of savings bond is the Series I bond.
- Investors pay the face value for Series I bonds.
- The interest rate on this bond fluctuates with the rate of inflation over time
EE bonds and I bonds are attractive to people who want safe, guaranteed long-term investments.
Besides the securities issued by the Treasury Department, bonds are issued by other federal agencies as well.
- However, they offer a slightly higher interest rate than treasury securities.
- Their maturities range from one to 30 years, with an average life of about 12 years.
- Generally, their minimum denomination is $25,000.
Local and state governments issue municipal bonds.
- Municipal bonds are sold to finance city, town, or regional projects such as schools, highways, and airports.
  - You can buy them from a broker or directly from the government that issued them.
Bonds issued by corporations are called corporate bonds.
- Corporate bonds can be bought and sold through brokerage firms.
  - They are usually used to finance construction and equipment.
The value of a corporate bond fluctuates according to the overall interest rates in the economy.

Advantages and Disadvantages of Buying Bonds

Bonds have many of the same advantages and disadvantages as savings accounts.
One advantage is that most bonds are secure, especially those from government and large, established businesses.
In particular, bonds and other securities issued by the U.S. government enjoy the full faith and credit of the federal government.
Bonds also pay interest.
Although they are liquid, one disadvantage of bonds is that an investor can lose money if a bond is sold or redeemed before it matures.
Most bonds are written for a minimum of $1,000, which may make them out of reach for some investors.
Like savings accounts, bonds may not keep up with inflation

Stocks

Investing in Stocks

A stock is a share of ownership in a corporation.
When you buy stock, you receive a stock certificate that indicates ownership in a corporation.
Stock prices may change throughout the day, every business day.
- There is no promise that a stockholder will get his or her money back or that he or she will receive income from owning stock.
- Therefore, stocks are generally more risky than bonds.
Companies that sell stock must follow rules set up by the Securities and Exchange Commission, or SEC.
- The SEC is a U.S. government agency that supervises the exchange of securities to protect investors from wrongdoing.
The amount of money the stock earns depends on its type of return and rate of return.
There are two ways that you can receive a return on stocks.
- One is through the payment of dividends, which is a share of profits given to stockholders.
  - Dividends are usually paid quarterly in cash or in more shares of stock.
- Many stockholders receive a return on stock when they sell it.
  - Selling stock for more than you paid for it results in a capital gain.
    - A capital gain is a profit made from the sale of a financial asset such as stock or a bond.
    - A capital loss is an amount lost when an asset is sold for less than its cost.
The rate of return on stocks is always expressed as a percentage of the original investment and figured on an annual basis.
When a company sells stock, it usually offers two different types.
- Common stock is stock that provides the most basic form of corporate ownership.
- Preferred stock is stock that gives the owner the advantage of receiving cash dividends before common stockholders receive any.
A dividend does not have to be paid each year.
Stocks carry different levels of risk.
- Blue-chip stocks are stocks in large, well-established companies that have a good track record of success and profitability.
- Speculative stocks are stocks in new firms without an established track record.
A stockbroker is a person who buys and sells stocks, bonds, and other securities for clients.
- Stockbrokers act as a link between buyers and sellers.
- As a fee for their services, stockbrokers charge a commission, which is either a percentage of the value of the stock or a set amount for each transaction.
Many people lower their investment fees by buying and selling securities using the Internet.
Most stocks are bought and sold through a trading market known as a stock exchange.
- A stock exchange is an organized market for buying and selling financial securities.
- Some of the best-known exchanges are the New York Stock Exchange (NYSE®) and the American Stock Exchange (Amex®).
Over-the-counter securities are not listed or sold through stock exchanges.
- They are traded directly between buyers and sellers in person or via computer.
- The NASDAQ is an electronic stock market system that quotes over-the-counter securities.
Mutual funds lessen the risk of investing in the stock market.
- A mutual fund is a fund created by an investment firm that raises money from many shareholders and invests it in a variety of stocks or other investments.
Most people who are investing for retirement will own individual stocks or bonds for a number of years.
Long holding periods are an excellent way to build wealth while minimizing risk.

Advantages and Disadvantages of Stocks

A general principle when investing is that the greater the risk, the greater the possibility of a larger return.
A major disadvantage of stocks is that you have more risk of losing your investment when putting money into them rather than a savings account or bonds.
However, a big advantage of stocks is that long- term comparisons of returns on stocks and returns from savings accounts or bonds show stocks do better over time.
If a company declares bankruptcy, its stockholders may receive little or none of their investment back.
Liquidity refers to how easily an investment can be turned into cash.
- Most stocks can quickly be turned into cash by selling them.