Stocks and Bonds

Just as their name suggests, common stocks are the most widely used way that people purchase a piece (or a share) of a company and that company’s future. Owners of common stock can vote on issues facing the company – such as company mergers – though they cannot vote on cash or stock dividends.

You can earn income from common stocks in one of two ways:

• Capital gains: selling a stock for more than its purchased value
• Dividends: regular, but not guaranteed, payments from the company, usually issued quarterly

Preferred stocks are traded on the market, just as common stocks are, but are given preferential treatment when it comes time to paying dividends or if a company is liquifying its assets. Preferred stock entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends. If the corporation fails, the preferred stock holder has first rights to company’s assets after any creditors claims. However, owners of preferred stock do not get to vote on company matters.

You can earn income from preferred stocks in one of two ways:

• Capital gains: selling a stock for more than its purchased value
• Dividends: regular, but not guaranteed, payments from the company, usually issued quarterly

Bonds are a type of fixed-income investment, which means they pay investors on a specific schedule set by the parameters of the bond. It’s essentially a loan to an entity that is looking to raise immediate revenue, which will then pay you interest for use of your money. They tend to be more stable than stocks, so they reduce some risk in a portfolio.

Corporate bonds are issued by companies looking for cash, as bonds are typically a more favorable way to raise money for a project than a loan.

Municipal bonds are issued by states and municipalities.

Government bonds are issued by the U.S. Treasury. Those with less than a year until they mature are called “bills,” those with 1-10 years until maturity are called “notes” and those with more than 10 years until they mature are called “bonds”.

Agency bonds are issued by government–affiliated organizations (such as the Tennessee Valley Authority or Fannie Mae).