Stocks and Bonds

You often hear about stocks and bonds in the same sentence, but they are very different. Stocks represent ownership in the company, and that’s it. If the company does not do well, then they may not issue a dividend, and if the company really doesn’t do well, and goes bankrupt, then the shareholders may lose everything as the banks and finance houses who lent money to the company will be paid out first from any sale of assets. If there’s anything money left after the assets are sold off and the debtors paid back, then the shareholders get their “share” of it.

Bonds are totally different. Bonds are issued so that companies can borrow money, and there is a promise to pay it back with interest. The government does the same thing, issuing Treasury Bonds to get working capital. Bonds are usually scheduled to be paid back in a number of years, and at that time the bond holder will get their money back with interest. Bonds can also be traded, or bought and sold, and you may be surprised to learn that they don’t always change hands for the face value, particularly if it’s some time before the bond is due to be paid back. But bonds are guaranteed if the company fails, at least to the extent that assets can be sold to cover the debt.

The Stock Exchange

People talk about “the stock exchange”, but actually there are many different stock exchanges, and some countries have several. Basically, they are places where stocks are bought and sold between brokers and market makers, and they can have quite a hectic image as portrayed in the movies. But some others, like the US NASDAQ market, are all electronic, basically a bulletin board, rather than a trading floor.

Different shares are traded in different stock exchanges. For instance, the NASDAQ has a reputation for trading technology stocks. Depending how you approach trading, which exchange lists what company may not matter to you. You may just deal through your broker who will take care of that detail. However, you will often find that you can only trade shares of the country where your broker is located. If you want to take part in trading in other areas of the world, you will be limited in your involvement unless you can open an account over there.

A term you may hear about in trading is ‘liquidity’. It basically means how much a stock is traded, and therefore how easy it is to find buyers and sellers if you want to sell or buy at any time. How ‘liquid’ a stock is matters, as with low liquidity you may not find many people wanting to trade with you when you think the time is right, and that may force you to pay more or sell for less than you want to.

Another pair of terms that are used frequently is the ‘bulls and bears’. A ‘bull’ is someone who thinks the prices are rising, a bullish market, and you can remember it as bulls’ horns go up. A “bear” is the opposite, and a bearish market goes down in value, just as a bear would knock you down.

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