| When the government wants to raise money, | | | | can end up with nothing after the creditors |
| they can issue bonds and borrow money from | | | | (including bondholders) get what's due them. You |
| the people. When corporations want to raise large | | | | will know you are in trouble when your stock |
| amounts of capital (money), they can issue | | | | approaches zero and quits trading in the stock |
| stocks or bonds. If they issue bonds they borrow | | | | market. The only good news in this case is that |
| money from investors, like government entities | | | | you can only lose what you invested. Second, you |
| do. If they issue stocks they sell shares of | | | | may have a tax write-off for your losses. |
| ownership in their company, common stock. | | | | Bonds are of a different breed. When you own |
| In either case, once the bonds or stocks are sold | | | | bonds the issuer owes you money, and pays you |
| to the public, the government or corporation gets | | | | interest. If the company or government entity |
| its money and has an obligation to whoever owns | | | | (like the U.S. government or the state of Ohio) |
| the bonds or stocks it issued. After this the | | | | gets into financial trouble and defaults on interest |
| stocks or bonds are securities that trade in the | | | | payments or principal, you are a creditor with |
| open market. Stocks trade in the stock market | | | | certain rights. For example, you get yours before |
| and bonds trade in the bond market. How simple | | | | stockholders get theirs. Thus, bonds are safer |
| can you get? | | | | than stocks, but they lack the profit potential of |
| So, when you or I buy stocks or bonds, we are | | | | the former. |
| simply buying them in the market through a | | | | Every bond has a limited life, unlike stocks that |
| broker who charges us a commission for his | | | | live indefinitely. When a bond matures, the owner |
| services. The government or corporation already | | | | (whoever it is) is paid back the principal, usually |
| got their money. We are simply buying bonds or | | | | $1000 for most bonds. Now pay attention. Bonds |
| shares of stock a previous owner told his broker | | | | are safer than stocks. But this does not mean |
| to sell. When we want to sell we simply do it | | | | that they are necessarily safe. The main |
| through our broker as well. That's why having a | | | | advantage of owning bonds over really safe |
| stock market and a bond market is so important. | | | | investments like savings accounts, CD's and |
| Markets provide liquidity. In other words, who | | | | Savings Bonds (which are savings vehicles and not |
| would buy these stocks and bonds if they could | | | | really bonds) is that they pay higher interest |
| not sell them at a fair price quickly and easily? | | | | rates. But, unlike the safer investments just |
| As investments, stocks and bonds are like night | | | | mentioned, bonds trade in the bond market ... and |
| and day - heads and tails. When you own stocks | | | | anything that trades in any market experiences |
| you have ownership in the company. If the | | | | price changes as it trades. |
| company prospers and the stock market is on a | | | | In other words, the price or value of bonds |
| roll, you benefit as the price or value of your | | | | fluctuates. That means that they go up and down |
| stock shares go up. If the company pays | | | | in value like stocks do. If you hold onto a typical |
| dividends, you get your fair share based on the | | | | bond until it matures, you should get $1000, no |
| number of shares you own. All common stock | | | | matter what you paid for it. On the other hand, if |
| shares are equal. Some folks just own more | | | | you sell it before maturity, you will get more or |
| shares than others. | | | | less, depending on the market price of your bond |
| On the other hand, if the company goes broke | | | | at the time. |
| you lose big. As a shareholder and an owner, you | | | | |