Investing in the capital markets is attractive to many people, and for some it is even prestigious. However, few outside the professional community are aware of the specifics of stocks and bonds, as well as the opportunities to profit from investments in this type of instruments.
"An investment in knowledge pays the best interest" said historian Benjamin Franklin, one of the founding fathers of the United States. And since we tend to largely agree with his opinion, with this article we launch a whole series of materials that aim to acquaint a wider range of people with the opportunities for trading on the stock exchange market, the links between the various assets, as well as terms such as "bulls", "bears" and why central bank decisions are so important to markets.
You've probably heard the popular definition of what a stock is - a stake in a company. But shareholders do not own companies, only shares issued by companies. The shareholders in a company are entitled to a part of the company's profit, and on the other hand, the financial result is actually the basis of the value of the shares. However, many companies do not pay a dividend, but instead reinvest the profits back into the company's growth.
The shares are issued by the companies for the purpose of raising capital in order to develop the business or to launch new products. However, there is a difference whether shares are bought directly from the company (on the primary market) or by another shareholder (on the secondary market).
Let us also pay attention to the difference between the nominal and issue value of a share. The nominal value determines how many equal parts (number of shares) the share capital of a company is divided. The issue value, on the other hand, is determined by a decision of the shareholders at the issue of each new issue of securities and must be greater than or equal to the nominal value.
However, there are other ways for companies to raise capital - for example, through a bank loan or by issuing debt, namely bonds. Bonds differ significantly from stocks.
Firstly, the bondholders are creditors of the company and are entitled to interest as well as to the payment of the principal. In the event of bankruptcy, creditors have an advantage, while shareholders are last in compensation and often receive nothing. This difference clearly shows that stocks are a riskier investment than bonds.
The opposite is also true - bondholders acquire only within a certain interest rate, while shareholders can take advantage of the return that is generated by increasing financial results and, accordingly, rising stocks - theoretically to infinity. Thus, the greater the risk, the greater the return.
Substantially, a bond is a fixed income instrument that is a loan from an investor. Bonds can be corporate or governmental/state, used to finance projects or current needs. The bonds have a maturity date when the principal of the loan is due to the bondholder, and interest payments may be fixed or variable.
Bonds are commonly referred to as fixed income securities and are one of the three asset classes most commonly used by individual investors, along with stocks and money market instruments. Many corporate and government bonds are publicly traded, others are traded only off-exchange or directly between the borrower and the lender. Most bonds can be sold by the original holder to other investors after they are issued. In other words, the bond investor is not required to hold his bonds until the maturity date.
What to invest in?
One of the most frequently asked questions by investors is whether to invest their money in stocks and bonds, and for most the answer is probably a combination of the two. But this is not always the case.
Shortly said, holding shares gives the right to vote in the general meeting and the right to receive a dividend (but it is not guaranteed). The bondholder does not have the right to vote and does not benefit from growing profits and dividends, but there are other advantages, such as that the return is guaranteed.
Thus, in fact, the decision of what to invest in and whether to have risk diversification depends on several factors, including risk tolerance and the age of the investor. Yes, it may sound strange, but in general, financial experts advise people to move to lower-risk investments with age.
One of the greatest investors of all time, Warren Buffett, who thanks to his skills and flair managed to accumulate a fortune of 60 billion dollars, says " f you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes".
In any case, the best strategy you can choose, unless you are a professional investor, is to seek the advice of a financial advisor to determine your strategy, whether and how to diversify the risk or take advantage of the benefits of capital markets through mutual fund investments.
Contacts:
Sofia, 19 Georg Washington Str., 2nd floor
tel.: 02/42 19 518, 02/42 19 517
email: office@compass-invest.eu
COMPASS INVEST JSC- Your personal Investment Advisor.
Compass Invest JSC is licensed management company by the Financial Management Commission since 2006.
Important information: You should keep in mind that the value of the shares and the income from them may decrease, profits are not guaranteed and there is a risk that you will not return the full amount of the invested funds. Past performance is not a reliable indicator of future performance, unit prices and their returns may decrease as well as increase, and investors may not receive the amount they originally invested. No profits are guaranteed. Investments are not guaranteed by a guarantee fund set up by the state or another form of guarantee. The prospectus and the document with key information about the investor can be obtained on paper and/or electronic media in Bulgarian in the office of the management company on the address: Sofia, 19 Georg Washington Str., 2nd floor every working day from 9 am to 5 pm and on the website of Compass Invest JSC.