Different Types of Bonds
Investing in bonds is very safe, and
the returns are usually very good. There are four basic types of bonds
available and they are sold through the Government, through
corporations, state and local governments, and foreign governments.
The greatest thing about bonds is that
you will get your initial investment back. This makes bonds the perfect
investment vehicle for those who are new to investing, or for those who
have a low risk tolerance.
The United States Government sells
Treasury Bonds through the Treasury Department. You can purchase
Treasury Bonds with maturity dates ranging from three months to thirty
years.
Treasury bonds include Treasury Notes
(T-Notes), Treasury Bills (T-Bills), and Treasury Bonds. All Treasury
bonds are backed by the United States Government, and tax is only
charged on the interest that the bonds earn.
Corporate bonds are sold through
public securities markets. A corporate bond is essentially a company
selling its debt. Corporate bonds usually have high interest rates, but
they are a bit risky. If the company goes belly-up, the bond is
worthless.
State and local Governments also sell
bonds. Unlike bonds issued by the federal government, these bonds
usually have higher interest rates. This is because State and Local
Governments can indeed go bankrupt – unlike the federal government.
State and Local Government bonds are
free from income taxes – even on the interest. State and local taxes
may also be waived. Tax-free Municipal Bonds are common State and Local
Government Bonds.
Purchasing foreign bonds is actually
very difficult, and is often done as part of a mutual fund. It is often
very risky to invest in foreign countries. The safest type of bond to
buy is one that is issued by the US Government.
The interest may be a bit lower, but
again, there is little or no risk involved. For best results, when a
bond reaches maturity, reinvest it into another bond.
Different Types of Stock
The different types of stock are what
confuse most first time investors. That confusion causes people to turn
away from the stock market altogether, or to make unwise investments.
If you are going to play the stock market, you must know what types of
stock are available and what it all means!
Common Stock is a term that you will
hear quite often. Anyone can purchase common stock, regardless of age,
income, age, or financial standing. Common stock is essentially part
ownership in the business you are investing in. As the company grows
and earns money, the value of your stock rises. On the other hand, if
the company does poorly or goes bankrupt, the value of your stock
falls. Common stock holders do not participate in the day to day
operations of a business, but they do have the power to elect the board
of directors.
Along with common stock, there are
also different classes of stock. The different classes of stock in one
company are often called Class A and Class B. The first class, class A,
essentially gives the stock owner more votes per share of stock than
the owners of class B stock. The ability to create different classes of
stock in a corporation has existed since 1987. Many investors avoid
stock that has more than one class, and stocks that have more than one
class are not called common stock.
The most upscale type of stock is of
course Preferred Stock. Preferred stock isn’t exactly a stock. It is a
mix of a stock and a bond. The owner’s of preferred stock can lay claim
to the assets of the company in the case of bankruptcy, and preferred
stock holders get the proceeds of the profits from a company before the
common stock owners. If you think that you may prefer this preferred
stock, be aware that the company typically has the right to buy the
stock back from the stock owner and stop paying dividends.
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