Application: Investing in the Stock Market
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I started investing in stock 2 years ago and I have always wondered how bonds work, but never took the time to research on them. I have seen how many local governments use bond to raise money for their municipality, but I have always seen that many people lose money. Bonds are used to borrow money from the public on a long term basis and during that time the borrower will pay the interest. Something that I found interesting is that when interest rates rise, the present value of the bond's remaining cash flows declines, and the bond is worth less. When interest rates fall, the bond is worth more. Stocks and bonds are a little different because in a common stock not even the promised cash flows are known in advance, stock has no maturity and there is no way to easily observe the rate of return the market requires.
I started investing in the stock market thinking what many people still think that you just put your money on a stock and it will grow and I would be millionaire, but the truth is that is not that easy. Many companies as we know issue stocks to increase their cash, but when a company's issues dividends is to recompense the investors for investing that money in them. A company usually issue dividends only when there is enough money left over after all operating and expansion expenses are met. Companies usually attempt to maintain balance their debt and equity ratios before making any dividends distribution (Investopedia, 2015).
Reference:
Investopedia (2015) Dividends Retrived from: http://www.investopedia.com/articles/03/011703.asp on 5 Jan 2015
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Solution Summary
This solution responds to a stock investment scenario.
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Most of your comments about stocks and bonds are correct. Bottom line is that both comes with their fair share of risks and return. Bonds offer periodic interest payments (generally every 6 months or every year) and at the end of the ...
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