A Guide to Bonds, Stocks, and Other Securities


Securities are assets with no value. However, they do carry a lot of power such as voting rights in a company. They are evidence of financial investment. Two of the most common types are debt securities (usually in the form of bonds) and equity securities (usually in the form of stocks).

Bonds

A bond is a form of debt security. It is a promise to pay. A government (state or otherwise) sells bonds so that it can afford projects and then pays back the investors with interest. A bond has a nominal value and also an interest rate. Bonds can also be affected by inflation, so if a government cannot repay the money quickly, investors know they will lose money and not buy a bond. For example, public service infrastructure projects such as bridges, roads and schools will not generate income (at least not quickly) so investors will not want to buy in.

Types of Bonds

  • A fixed rate bond has an interest (or coupon) that remains constant through the life of the bond.
  • With a treasury bond, interest is paid every six months over the course of thirty years. When thirty years is up, the investor receives the face value of the bond.
  • Municipal bonds are issued by local and state governments for more regional projects. One benefit to investors is that the interest is tax exempt.
  • Build America Bonds are fairly new. They were introduced with the American Recovery and Reinvestment Act of 2009. Unlike other bonds, their interest is susceptible to federal taxation. However, they are state tax exempt in the state in which one is issued. They often offer higher yields than municipal bonds.
  • War Bonds are issued by a county in need of money to fight a war. They are especially known for raising money during World War II. Between December 1941 and September 1945, the United States raised around 185.7 billion dollars with bonds.
  • A floating rate note (PDF) is a bond with a variable interest rate based on U.S. Treasury rates, LIBOR or mortgage interests rate indices.
  • Zero coupon bonds do not pay interest. Instead, they are sold at a discount and when they mature, the bond is bought back at full value.
  • Inflation-linked bonds are special because they protect against inflation. However, the interest rates are usually lower than they are with other bonds.
  • Registered & Bearer Bonds are two sides of the same coin. One has a face and the other does not. A bearer bond does not have a name attached to it. Instead, whoever has possession of it is the assumed holder. Registered bonds have specific owners on record. Most securities are registered because in 1983, the U.S. Government removed the tax exempt status of bearer bonds.
  • Perpetual bonds are forms of bonds that never mature. They just keep giving off interest. There were perpetual bonds issued in 1888 that are still traded today.

Additional Bond Resources

  • Bond Financing – John Zipperer’s 2005 article from Affordable Housing Finance.
  • Bond 101 – How does a bond work? Find out with this helpful article by Marianne Russ.
  • Bonds – The Money Advice Service offers an explanation of the risk of buying and selling bonds.
  • Types of Bonds – Wells-Fargo outlines the types of bonds and some other government securities.
  • Investing in Bonds – CNN Money lists the types of bonds each with a brief description.

Stock
Having stock represents having partial ownership of a corporation. It exists in the form of shares and every person with one is known as a shareholder. A corporation must decide on a number of shares at the time of its formation and in the interest of future growth, most choose to use a number much greater than reasonable for the business’s current status. As shares do not disappear, they are traded or sold (usually through a stock broker). If a shareholder sells their share for more than they purchased it, they will make a profit.

Common Stock vs. Preferred Stock

There are two main types of stock: common stock and preferred stock. Holders of common stock have the right to vote at corporate meetings, they have the right to sell their stock and the right to purchase additional shares of the corporation’s stock. Preferred stockholders generally do not get voting rights but they will receive dividend payments before the holders of common stock. Preferred stock is divided into several types including prior preferred stock which is yield quicker but smaller results than standard preferred stock, preference preferred stock which is on a basis of seniority, convertible preferred stock which is exchanged for common stock (once), participating preferred stock which has the potential to yield extra dividends if a company is successful and cumulative preferred stock which ranks the lowest priority, but still above common stock. If a shareholder with preferred stock is passed over, the debt accrues and is eventually paid. With common stock, the shareholder receives nothing.

Additional Stock Resources

  • Common & Preferred Stock – Professor Carter from UMass Lowell uses some charts to explain the difference between common and preferred stock.
  • Stocks – Learn about the classes of stock from the State of Wisconsin’s Department of Financial Institutions.
  • The Stock Market – On this website maintained by the Economics Department at Mount Holyoke College, readers are given a rundown of the types of preferred stock.

General Securities Resources

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