The most important thing about stocks and bonds for those, who takes the first steps in the securities market.
In the securities market, funds can be invested in securities, currency, precious metals, Mutual funds or other assets - depending on your tasks and attitude to risk. In this article we will talk about the most popular monetary instruments - stocks and bonds..
What are similar promotions
Share is an equity security, which provides its owner with a share in the capital of the company. By purchasing company shares, you get the right to participate in its management, also on a part of income.
Shares can be ordinary or preferred. 1-s give the holder the right to vote at the shareholders' meeting, but the payment of dividends on them is not promised. 2-s do not give the opportunity to vote, but their holders have a pre-emptive right in the payment of dividends.
The pros of investing in stocks:
- you don't need a lot of capital to start;
- potentially highest efficiency;
- the opportunity to take part in the management of the company;
- highest liquidity (the ability to quickly purchase or submit a share at a cost, close to market).
- highest market dangers - stocks can both rise in price, so to fall in price;
- dependence of prices on external reasons.
What are bonds like
Bond - debt security, which is issued by a company or a municipal authority to obtain an additional source of funding. By purchasing a bond, the financier practically lends funds to the issuer that issued it. Issuer, from my side, undertakes to return the bond price to the financier (par) and the percentage for the use of funds (Coupons).
Usually, the effectiveness of the bond is fixed - in other words, you understand the size and date of payments in advance. The term of the bond is also known in advance - it can be 1, 2, three years or more. Depending on the issuer, it is customary to divide debt securities into municipal, city and corporate:
- Municipal bonds (OFZ) Are securities, issued by the Ministry of Finance. By purchasing them, you practically lend money to the state, and receive income at a fixed rate. With all this, the government acts as a guarantor of the return of your investments..
- City bonds Are debt securities, which are produced by the regions of Russia. Usually, they are extremely effective, than OFZ, due to more low solvency.
- Corporate Bonds Are debt securities of companies. Possible effectiveness and dangers for them are higher, than under OFZ. More reliable corporate bonds include securities of the Savings Bank, Russian Railways, Gazprom and other companies with municipal participation.
Pros of investing in bonds:
- low risk level;
- the ability to receive a measured and predictable income;
- the ability to regulate the ratio of risk and reliability, investing in OFZ and corporate bonds;
- bonds are suitable for both short-term, and for long-term investments.
Minuses:
- small percentage;
- the holder cannot influence the policies of the companies.
How profit on shares is formed
Income from investing in stocks can be obtained in two ways: in the form of dividends and the difference between the buy and sell price. The term and procedure for the payment of dividends is determined by the decision of the general meeting of shareholders or the charter of the company. If the company has not made a profit or needs the money for other purposes, she can refuse to pay dividends.
The essence of the second method of generating income from shares is reduced to the rule "buy cheaper - sell more expensive". However, this strategy is not easy to implement.: stocks are constantly rising and falling, and not every investor succeeds in choosing the best time to buy or sell them.
How is bond profit formed
Income from investing in bonds can be coupon payments, rise in the market value of a security, and also under certain conditions - refund of the par value.
- Coupons. The main type of income on bonds. The issuer regularly pays interest to the owner of the securities for the use of his money. All coupon payment conditions, usually, known in advance.
- Market value growth. Similar to stocks, the value of bonds may change, and if the price rises, the paper can be sold profitably, without waiting for the date of refund.
- Profit on return of par value. Those bondholders will get that kind of income., who bought them at a reduced cost (at a discount).
Potential risks
Let's analyze the main risks of investing in stocks and bonds.
Promotions
The main and most common risk when buying shares is a decrease in their value. Changes in quotes may be short-term: if the company has no serious problems, then price fluctuations can be waited out, not selling paper. In the event of negative factors, affecting the company's activities, quotes may not recover, which will lead to big losses.
Another Risk for Shareholders - Lack of Dividends. Their size is determined based on the results of the financial year at a meeting of shareholders and depends on the company's profit and its priorities.. If you want to receive dividends regularly, pay attention to the so-called "dividend aristocrats". These are companies, which annually increase the size of dividend payments for more than 25 years.
Bonds
- Credit risks. They occur when the reliability of the issuer decreases and are associated with its inability to fulfill debt obligations.
- Inflation risk. When buying bonds, the owner receives a fixed percentage of profit. Inflation may exceed bond yields.
- Market risk. The interest rate on bonds depends on the key rate of the Central Bank. When the latter grows, old fixed coupon bond issues fall in price. And vice versa, the price of securities is rising, if the Central Bank rate falls.
- Liquidity risk. Bondholders may face the problem of selling their securities due to financial problems or the unreliability of the issuer. These factors reduce the interest of other investors in such an instrument..
What to choose: stocks or bonds
Professional investors recommend combining stocks and bonds in an investment portfolio. This will diversify investments and reduce the risks of capital loss..
Before choosing an investment instrument, determine the amount of capital, which are you willing to invest, income, which you want to get, as well as your attitude to risk and investment time frames. Investors, who are willing to take risks for higher profitability, it is worth taking a closer look at the shares of promising companies, and themes, who wants to save capital, OFZ and bonds of reliable corporations may be suitable.