Stocks and bonds - basic information

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There are many ways to invest in the financial world. In the first instance, they can be classified according to the degree of risk. The overriding principle here seems to be the principle that the more someone is at risk of loss, the more profits one can expect. As a result, there is a clear difference between the shares of a listed company and government bonds. The shares are intended for seasoned, experienced investors who are able to take a high risk and thus expect a large loss - or profit. Bonds are of a different nature - calm, even and safe, but also less profitable. Exactly what stocks and bonds are characterized by are presented below.

Stocks and bonds as securities

Stocks and bonds are securities, that is, property rights. They are in the form of a document or an entry in an IT system on a securities account. Identification marks should be distinguished from securities, which only confirm a legal event or the acquisition of other rights (e.g. a public transport ticket).

What is action?

Shares are referred to in the context of joint stock companies that are listed on the Stock Exchange. They are primarily the so-called an equity financial instrument that confirms participation in the capital of a listed company and enables participation in profits as well as participation in decision-making activities of the entity - through the general meeting of shareholders.

Once a year, joint stock companies decide what to do with the earned profit. The most popular solution is the payment of money through dividends. However, many companies try to invest the surplus in order to strengthen their position on the market. The shareholders then benefit by obtaining a higher unit value per share.

Can these types of securities differ from each other? It turns out that it is. Shares can be divided into registered and bearer shares. The former identify a specific shareholder by name (his data is entered in the securities register - in the share register). In order to effectively transfer the ownership of shares, it is necessary not only to hand them over, but also to prepare a written declaration of will on their disposal.

On the other hand, bearer shares do not include the name of a specific shareholder, and the rights are transferred by simply handing over the document to the buyer. However, it should be noted that these types of shares may not be issued to the new owner until full payment of the fees due for their purchase. In the event that the payment is partially settled, the shareholder is issued with a temporary registered certificate.

Further differentiation of shares may concern the issue of equal rights arising from them. A joint-stock company may issue the so-called preference shares, including the right to, for example, two votes at the general meeting. As a rule, their buyers are the founders of the enterprise, who thus want to exercise control over their economic activity.

Another preference may be for the payment of dividends. The holders of these particular stocks can count on more profit when distributing the excess income. It is worth noting that only ordinary shares can be purchased on the Stock Exchange.

What is a bond?

The bonds are debt securities which state that the issuer of the bonds has incurred debt with their buyer. The role of the issuer is reduced to the periodic payment of interest to the holder and the so-called maturity date - repayment of the nominal value.

In practice, this mechanism concerns the indebtedness of the State Treasury to its citizens or foreign investors. Interestingly, bonds can also be issued by a commune or a private enterprise.

The interest rate depends on the creditworthiness of the issuer. Moreover, it is commensurate with the risk borne - that is, in practice, low.

As a rule, the most trusted issuers of bonds are the governments of the most economically developed countries. Secondly, bonds issued by enterprises are taken into account. Their credibility and the degree of risk are assessed by independent financial institutions, e.g. Moody's.

When purchasing bonds, be aware that there are several types of prices.

Initially, a nominal price is established. Interest will be charged on its value, as well as the value at which the issuer will redeem it from the buyer after a specified period of time (1-5 years and more).

On the other hand, the issue price is the value at which bonds can be purchased. Its price may be lower than the nominal price. It all depends on how the issuer assesses the chances of the issue's success.

When the issue is sold, the bonds are listed on the stock exchange. Then the price is no longer determined by the issuer, but by the market, due to the relationship between supply and demand. Then you can talk about the market price. However, it should not be considered as the payment price when the bonds are purchased on the stock exchange. The real amount of the transaction must be increased by interest (settlement price). It is worth adding that the value of interest is published in the daily financial press.

Bonds differ from shares in that they do not give the holder any rights over the issuer. It is about rights such as joint ownership, dividends or the right to participate in general meetings.