A stock is an equity security that represents ownership in a corporation. Each share of stock represents a claim on the corporation’s earnings and assets. Corporations may issue both commonstock and preferred stock. Stockholders accept the risks inherent in owning a company.
A bond represents the indebtedness of their issuer. A bond is any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum for the use of the money, usually at specific intervals, and to repay the principal amount of the loan at maturity.
A mutual fund is operated by an investment company that raises a pool of money from shareholders and invests it into stocks, bonds, options, futures, currencies or money market securities. All shareholders share equally in the gains and losses generated by the fund. A mutual fund’s investment objectives, risks, charges and expenses are stated in the prospectus.
A derivative instrument is a contract whose value is derived from the performance of an underlying financial asset, index or other investments. When used properly, they can create many benefits, including the reduction of risk. Options are the most common derivatives.
An annuity is a form of contract sold by life insurance companies that guarantees a fixed or variable payment to the owner of the annuity, the annuitant, at some future time, usually at retirement. All capital in an annuity grows tax-deferred.
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A stock is an equity security that represents ownership in a corporation. Each share of stock represents a claim on the corporation’s earnings and assets. Corporations may issue both common stock and preferred stock.
Common stock usually entitles the stockholder to vote on the selection of directors and other important matters as well as receiving dividends on the corporation’s holdings. In the case of a liquidation, the common stockholder is the last in line to receive compensation claims. Generally, common stock has more potential for appreciation than preferred.
Preferred stock usually pays a fixed dividend or fixed income stream from the corporation’s earning that is not guaranteed but receives preference over common stock dividends. In the case of a liquidation of a corporation, preferred stockholders are compensated before common stockholders. Preferred stock does not ordinarily carry voting rights.
All stocks are subject to market volatility, so you could pay more when buying and receive less when selling any stock.
Prices of preferred stocks can rise or fall depending on interest rates. Interest rate changes have a greater effect on long-term and perpetual preferred socks.
All preferred stocks carry the risk that the issuer will default or be unable to make timely payments of interest and principal. Highly rated preferred stocks are presumed to have less credit risk than lower rated preferred socks. Credit risk can significantly impact preferred stock holders since they are paid after bondholders.
Some preferred stocks have call provisions that allow the issuer to buy back the securities at a fixed price before the stated maturity date. Issuers typically call preferred stocks when interest rates decline.
Certain events can impact a preferred stock issuer’s financial situation and ability to make timely payments to shareholders, including economic, political, legal, or regulatory changes and natural disasters. Event risk is unpredictable and can significantly impact preferred stock holders since they are paid after bondholders.
Preferred stocks sold on the secondary market may incur a substantial gain or loss. The secondary market may also be limited.