Investing in Business

While the basic purpose of business has not changed, the business world is very different today than it was a thousand years ago. For one thing, there were no stock exchanges (markets for buying and selling stocks) then. Take a look at your local newspaper and turn to the business section. Here, you can follow the "stocks" of literally thousands of companies organized as corporations. A share of stock is a certificate that represents ownership in the corporation. You'll see thousands of companies listed along with their stock prices, highs and lows for the year, ratio of price of the stock to earnings of the company. Some of these companies trade on the New York Stock Exchange, the American Stock Exchange, and various re­gional stock exchanges.

Billions of shares of stock trade every year in these markets. If you have as little as a few hundred dollars, you can buy shares of stock in your favorite company and follow its progress every day in the newspaper. You are part owner of that company.

With your shares of stock, you may have voting rights that allow you to express your opinion on major issues facing the company. To make sure that your interests are represented, public companies are audited by CPA firms, and the results are published in the company's annual report, which is mailed to shareholders.

Companies also issue bonds to the public. A bond is a certificate, usually in denominations of $1,000, that represents the debt of the company. An initial issue (original sale) of bonds (or stocks) is typically accomplished through an investment banker who assists the company in selling the bonds to investors. Bonds pay interest—a series of payments that compensate the lender for the risk and the trouble of making the loan. Bonds can be held to maturity, or they can be traded in the secondary market, like stocks. A secondary market is an exchange where bonds (also stocks) are bought and sold after the initial issue. When interest rates rise, bond prices fall, because the fixed cash flow stream that the bond offers is less desirable compared to that offered by new bonds.

Because of the booming number of companies with bonds outstanding and shares of stock, another industry has arisen in recent years: mutual funds. A mutual fund is an investment company that pools the money from many individual investors and invests it for the common goal of receiving a quality rate of return. A mutual fund is an excellent vehicle for many people who would not be able to buy bonds or shares of stock on their own.

Date: 2015-01-02; view: 829