Stocks and Bonds
Investing In Stocks
There are two types of stock shares: common and preferred. When you own a public company's common stock, you are entitled to vote in the election of company officers and on other important matters, and often you receive dividends on your shares. Common stock is usually riskier than preferred stock. Because of this, it offers greater potential returns and losses.
As a shareholder of preferred stock, you would not usually have voting rights, but you would receive a fixed dividend, which would be paid to you before common stockholders are paid. But owners of preferred stock pay for that privilege – usually your dividends would not increase when the company's profits increase. When a company does well, the price of its preferred stock tends to underperform its common shares. However, when a company fails, preferred stockholders are ahead of common stockholders in recouping their investment.
The terms large-cap, mid-cap, and small-cap refer to the issuing company’s market capitalization, which is the overall value of all shares of the company’s stock. Stocks are also categorized by the way they perform. Growth stocks are shares of companies that have exhibited relatively fast growth in earnings, which generally causes the stock price to go up. Keep in mind, though, that growth stocks are the most volatile and are just as likely to go down in price quickly. That is because growth companies are typically in new or fast-growing industries such as the high-tech sector. Growth stocks are considered riskier and often pay you lower or no dividends but appeal to investors who will accept more volatility and risk in hopes of a greater appreciation in share price over time.
Income stocks, on the other hand, are characterized as those that would pay you high and regular dividends. Stable and well-established industries, including utilities and financial institutions, typically produce income stocks. Blue chip stocks is the name applied to large, well-known, well-established companies with good reputations.
Value stocks are those considered to be selling at lower prices or “undervalued” because the companies that issue these shares have had business setbacks or are out of favor with investors. Value stocks have been known to outperform growth stocks in slow markets — and vice versa. But there is still a risk with value stocks because not all companies recover from setbacks.
Stocks are often referred to by a combination of the characteristics discussed above, such as shares of a “small-cap value” stock or of a “mid-cap growth” stock.
Dividends are the distribution of a company's profit or earnings back to the company's shareholders, or stockholders – the people and firms that have purchased that company's stock. Dividends are another way you can share in a company's growth; they are usually distributed quarterly.
When selecting stocks, it is good to keep in mind factors that could influence the company's performance and therefore, the investment.
Investing In Bonds
Bonds are actually loans that investors – individuals like you, as well as institutions – make to the federal government, state governments, municipalities, companies and government agencies. Investors who buy bonds become bondholders, or lenders. Bondholders get an "I.O.U." from the issuer of the bond, but the bondholder does not have any ownership rights like stockholders do.
Generally, bonds are fixed-income securities because they pay you, as the bondholder, a predetermined interest rate (also called "coupon rate"), regularly, that is set when the bond is issued. However, some bonds are issued with variable rates that can be affected by external economic factors. The borrower or issuer promises to pay back the loan in full on the maturity date. All bonds have set maturity dates – the date when it must be paid back to investors at its face amount, called "par value."
There are three common types of bonds:
- Municipal bonds issued by states, cities, counties and towns pay for public works projects like new schools and highways. Your investment in municipal bonds is generally exempt from federal income taxes, and in many states, from state income taxes, too. This may be advantageous if you are in a high tax bracket. A tax-free bond usually has a lower yield than a taxable bond. You can determine your net (after tax) yield from a taxable bond by subtracting the amount of yield from your marginal tax rate. (Your marginal tax rate is based on your filing status).
- Private corporations issue corporate bonds to raise money for capital expenditures, operations and acquisitions. Corporate bond interest is taxable and the prices are well publicized (usually in newspapers), so it is easy to know what the bonds are worth. As with stocks, investing in corporate bonds carries risk. The value of the bond may change depending on changes in the company's credit rating and, in the event of a corporate bankruptcy, holders of corporate bonds suffer significant losses.
- U.S. Treasury bonds are long-term debt instruments that pay for various government operations and are applied toward the national debt. Unlike stock and corporate bonds, Treasury bonds are backed by the full faith and credit of the U.S. government, which means that the resources of the United States would make sure that your investment was repaid, making them relatively secure investments.
To find out more about stocks and bonds, please contact our Certified Financial Planner (CFP®):
John V. Lyons, Infinex Investment Executive, 508-234-8112 Ext. 1009, or Email.
This website is for informational purposes and nothing on this website constitutes an offer to purchase or sell securities.
For more information about a particular non-deposit investment product, ask for a prospectus. Please read it carefully prior to investing.
Investment and insurance products and services are offered through INFINEX INVESTMENTS, INC. Member FINRA/SIPC. UniVest Financial Services is a trade name of UniBank. Infinex and UniBank are not affiliated. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.
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