If you want to invest in the stock market you have two options. You can either invest in stocks or bonds. Ideally, you would invest in both as it is a good policy to keep as varied an investment portfolio as possible.
Companies regularly release both stocks and bonds as a means of raising funds to pay for expansion. But stocks and bonds operate quite differently. Bonds are only allowed to be released by firms as a means of paying for their operations in the short term.
Bonds are issued with a specific period only. These short term investments raise money for the firm for a time, but when their period expires the bonds must be repaid to investors, usually with interest, using the money that the firms have made using the capital raised by the sale of the bonds.
When a firm issues stocks, the entire company is valued, and then broken up into equal shares that are sold on the stock market. The company does not have to pay back the capital raised by a share issue, and it can do what it likes with this money.
Corporate bonds, by their very nature, only exist for a short period of time. National and state governments also issue short term bonds, but they are also able to issue longer term bonds with periods of between ten and thirty years.
Stocks in a company have no time limit and can remain in place for as long as a company is in business. Investors can sell on their stocks, hopefully making a profit in the process, while the companies themselves can also buy back their own stocks if they wish to become a private company.
There is a certain level of risk attached to both stocks and bonds, and this risk level is reflected in their pricing. The credit rating of a firm, which is directly related to the ability of that firm to pay its debts, has a bearing on the price of both stocks and bonds.
Bonds are seen as being the less risky option as it is unusual for a company to ever default on bonds sold. This means that investors can take bigger risks when it comes to the credit ratings of the firms that they choose to buy bonds from, as companies with riskier credit ratings tend to offer far higher interest rates to help them sell bonds.
Lon Sonoski is very knowledgeable on savings and accounts and loves to write about
corporate bonds.
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