The Center For Debt Management
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Get The Facts On
Saving and Investing

What Are Investments All About?

When you make an investment, you are giving your money to a company or enterprise, hoping that it will be successful and pay you back with even more money.

Stocks and Bonds

Many companies offer investors the opportunity to buy either stocks or bonds. The following example shows you how stocks and bonds differ.

Let’s say you believe that a company that makes automobiles may be a good investment. Everyone you know is buying one of its cars. Plus your friends report that the company’s cars rarely break down and run well for years. You either have an investment professional investigate the company and read as much as possible about it, or you do it yourself. After your research, you’re convinced it’s a solid company that will sell many more cars in the years ahead.

The automobile company offers both stocks and bonds. With the bonds, the company agrees to pay you back your initial investment in ten years, plus pay you interest twice a year at the rate of 8% a year.

If you buy the stock, you take on the risk of potentially losing a portion or all of your initial investment if the company does poorly or the stock market drops in value. But you may also see the stock increase in value beyond what you could earn from the bonds. If you buy the stock, you become an "owner" of the company. You’ll only make money, if the company makes profits.

You wrestle with the decision. If you buy the bonds, you will get your money back plus the 8% interest a year. And you think the company will be able to honor its promise to you on the bonds because it has been in business for many years and doesn’t look like it could go bankrupt. The company has a long history of making cars and you know that its stock has gone up in price by 12% a year, plus it typically paid stockholders a dividend of 4% from its profits each year.

You take your time and make a careful decision. Only time will tell if you made the right choice. You’ll keep a close eye on the company and keep the stock as long as the company keeps selling a quality car that consumers want to drive.

The Main Differences Between
Stocks and Bonds

Bonds

The company promises to return money plus interest.

Risk: If the company goes bankrupt, your money may be lost. But if there is any money left, you will be paid before stockholders.

Stocks

If the company profits, its stock may go up in value and pay dividends. You may make more money than from the bonds.

Risk: The company may do poorly, and you’ll lose a portion or all of your investment.


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