A stock represents a share of ownership in a business. Investors who purchase stock are known as the company's stockholders or shareholders.
Your percentage of ownership in a company represents your share of the risks taken and profits generated by the company. If the company does well, your share of the total earnings will be proportionate to how much of the company's stock you own. The flip side, of course, is that your share of any loss will be similarly proportionate to your percentage of ownership, though you are not personally financially responsible for any share of the liabilities of the company in which you hold an equity interest.
Beyond that, depending on the company and the types of shares you have, stock ownership may carry other benefits. Specifically, you may be entitled to dividend payments which can generally be received in cash or additional shares, capital gains payouts, voting rights, and other corporate privileges. For example, common stockholders have the right to vote for candidates for the board of directors and on other important issues.
If you buy bonds, you're lending money to the company or governmental body that issued the bonds. You become a creditor, not an owner, of the bond issuer. The bond is in effect the issuer's IOU. You can lose the amount of the loan (your investment) if the company or governmental body fails, but the risk of loss to creditors (bondholders) is generally less than the risk for owners (shareholders). Bonds typically have less risk because it is advantageous for companies to maintain good credit ratings by making payments on time. Also, the law favors a company's bondholders over its shareholders if a business declares bankruptcy.
Bonds redeemed prior to maturity may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest-rate and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund's performance.
Stocks are often referred to as equity investments, while bonds are considered debt instruments or income investments. A mutual fund may invest in stocks, bonds or a combination of the two.
If you're an investor who’s looking for more information about how stocks and bonds can fit into your investment strategy, or if you have questions about the risks and potential rewards of these types of investments please contact one of our CFS Financial Advisors at Denali.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/ SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Denali Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
For specific tax advice, please consult a tax professional.