Feature Photo Cred: Euroasiannews.com
Jean-Robert “J.R.” Latortue, is a financial company founder of an investment management firm providing domestic and international clients with objective advice in a wrap fee advisory setting in lieu of commissions. J.R. earned his Bachelor degree at Temple University and is currently enrolled as a graduate student at the Harvard University Extension School; he is expected to earn a Master’s degree in Business Management from the Harvard School of Business in 2015. He is now looking to share his knowledge of finance with you and help you become more financially independent.
Investment 101 : The Difference Between Stocks and Bonds
Companies issue stock to the general public as a form of raising capital in order to finance their operating expenses, market their products, pay salaries, etc. After all somebody’s got to pay for that new private jet. In
simple terms think of stock ownership as if for example a very successful neighborhood carwash decided to expand and go global. The only difference is that the company needs millions of dollars to expand which means more capital is needed to market themselves, build better facilities, create more competitive products and services, etc. In the same example the company board members now decide to ask the entire neighborhood to pony up a few
dollars for a piece of the car wash’s business. They are offering ownership and that same piece of the business is referred to as a company stock, in the form of what we call stock shares. So you, as the investor buy shares
into the company making you a shareowner. Furthermore in return for throwing in some money towards the car wash owner, in essence buying the company shares, the operators of the carwash promise to provide you with
quarterly reports on the company financials, and even give you voting rights. Now imagine if that same car wash is really profitable, the owners of the car wash even distribute and share in the piece of the profits. Your shares have now become more valuable. The same can happen conversely if the company completely falls apart the company shares are now worthless. This is exactly what stock ownership represents, it represents ownership. Therefore when you own in a company stock you are a shareholder, you are no longer just the consumer buying their products; and the best part is that as a shareholder you actually have voting rights and can even influence the decisions that a company board make. You don’t like the new CEO the company hired, you can actually vote on the issue and tell the board to to change course. Owning stock in a successful company can provide a great sense of pride. Owning company stock also allows you to view yourself as a decision maker in companies, a visionary with a long term perspective and puts you on same side of the bargaining table with leaders of companies with a complete global reach.
When companies issue bonds to raise money, they are basically saying the exact same thing. Bonds are investment instruments that operate with he same paradigm. Bonds are different then stocks. As a bond holder the company actually owes you money. It is a promise to pay, and you do not own a piece of the company you are a debtor. A bond is a corporation giving you an IOU. The company basically issues bonds instead of stock stating that they would BORROW money from you, pay you back the principal on a certain date and while you waiting to get paid back that same company will pay you in the form of an annual interest rate. Therefore a public company writes you an interest payment check semiannually (typically in January and in June) for that amount. So say for example a company will promise to pay you 6% for every 1,000 dollars that you put into the company as a bond holder. So every thousand dollar bond would essentially pay you $6 per year in the form of two semiannual payments of 3$. Bonds are generally more conservative investments than stocks, they provide fixed rate of return and they can also trade up in value. The best part of owning a bond is if the company goes into the crapper bondholders get paid first before any stock holders.
Where to Start Investing
O.k. so you now know the brands that you love and that have been burning a hole in your pocket every month. These are perfect places to look into when it comes to investments. Fundamental research can begin on some of those same companies that produce those products and services that you know and love. Determine which companies you spend money that are local and that you understand what they do. Warren Buffett once stated that he wants to understand what a company makes or produces in a simple sentence. Some public companies that have a global reach and are headquartered in the two one five vicinity. Companies such as Comcast, Urban Outfitters, Pepsi, Rite Aid, Pep Boys just to name a few rep Philly. These are not necessarily my recommendations but they are a starting point for you to begin thinking about local investments in companies that have global reach.