Stocks and Bonds

Stocks and Bonds

For any business to be successful, it must raise capital and have a healthy cash flow. One of the ways to obtain funds is to borrow money, such as bank loans, which in accounting terminology is referred to as liabilities. Another accounting term is shareholders' equity and it refers to shares of the company, which represents another way a company may raise capital. When a company first goes public, its initial public offering (IPO), its shares becomes available to the public and investors who buy these become shareholders owning stocks.

In terms of investing, stocks are usually considered riskier than bonds. To own a controlling majority of shares, an investor must possess 51% of the shares. Further, an appointed Board of Directors typically makes decisions in a company. Stocks are traded on stock exchanges, such as the NASDAQ Stock Market. The NASDAQ is the largest stock exchange in the United States and is located in New York City. As a general rule, companies pay dividends to shareholders, from the profits remaining after all expenses.

Deloitte. Individuals cannot open an account with the central bank, only the government; individuals must go to the commercial banks. Photo by Elena

Alternatively, bonds are issued debt. Investing in government, municipal or federal bonds is commonly considered some of the less risky investment strategies. Risk tolerance and risk avoidance are important factors in determining the profile of an investor and in subsequently choosing an appropriate portfolio for that investor. Balanced portfolios may contain stocks and bonds in similar percentages. Moreover, investment portfolios may be geared towards income, growth or concentrate on guaranteed capital, such as GICs (guaranteed investment certificates).

T-Bills or Treasury bills are government backed short-term obligations. T-Bills are a very marketable money market security. T-Bills refer mainly to the US government, but other governments likewise use this strategy to raise money from the public. At maturity, T-Bills pay interest and are thus attractive investment opportunities due to their relative safety and simplicity.