Demystifying Stocks

  What are the basics of financial instruments?

Basics of financial instruments

• Two fundamental types of investments Bonds Stocks

• Other concepts Dividend

What are bonds?

Bonds

• Bond is a means of investing money by lending money to others

• When you invest in bonds, the bond you buy will show

. Amount of money being borrowed (face value)

. The interest rate (coupon rate or yield) that the borrower has to pay

. The interest payments (coupon payments)

. The deadline for paying the money back (maturity dates).

Bonds

• For e.g. Imagine you want to start your own grocery store and will need a capital amount to get started. You acquire the requisite funds from a friend and write down a receipt of this loan‘. I owe you Rs 1, 00,000 and will repay you the principal loan amount plus 5% interest'. Your friend has just bought a bond..

• PROS Bonds give higher interest rates compared to short-term investments

Bonds are less risky when compared to stocks.• CONS Selling bonds before they are due, may result in a loss, known as a

discount. If the issuer of the bond declares bankruptcy, you may lose your money.

Hence you must critically evaluate the credibility of the issuer of the bond, ensuring that he has the capability to repay the bond amount.

What are Stocks?

Stocks

• Stocks, also known as Equities, are shares in a company. It is the certificate of ownership of a corporation. In simple terms, when you invest in a company's stock or buy its shares, you own part of a company

• As a stockholder, you share a portion of the profit the company may make, as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value and yield higher dividends

Stocks

• Continuing with the previous example. To accrue more capital for your new grocery store, you sell half your company to your brother for Rs 50,000. You put this transaction in writing 'my new company will issue 100 shares of stock. My brother will buy 50 shares for Rs 50,000.'

....Thus, your brother has just bought 50% of the shares of stock of your company.

• DIVIDEND: A sum of money, determined by a company's directors, paid to shareholders of a corporation out of its earnings.

Remember: Understand and weigh how stocks or bonds will aid your financial decision before investing

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