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Mutual Funds - Mutual Funds.
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Posted by on June 4, 2008, 9:35 am
Basics of Equity
Equity investment refers to the buying and holding of shares by
individuals and funds in anticipation of returns through dividends and
capital gains. It also refers to equity (ownership) participation in a
private (unlisted) company, or a start-up (a company being created or
newly created).
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Equity shareholders are the owners of the company, sharing its risks,
profits, and losses. They have voting rights, and a residual claim on
the earnings and assets of the company, depending on their holdings.
Shareholders have liability only to the extent of their holding. Their
fortunes depend on the growth of the company: if the company prospers,
the equity shareholders will be the greatest gainers. They are
entitled to dividends and other benefits that the company may announce
from time to time. At the same time, there is no guarantee of a return
on their investments.
The value of a company increases in tandem with the rise in its assets
and cash accruals. This, in turn, will drive the value of its stock.
Positive news about future growth/expansion of the company tend to
impact stock price favourably.
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There are two ways of buying stock:
=B7 At an initial public offering (IPO), or issue of new shares by an
existing company
=B7 From the secondary market, the stock exchange
An IPO is the company=92s first listing of its common stock on a stock
exchange. In this case, an investor buys the stock directly from the
issuer, the company from the primary market. An investor can also buy/
sell a listed company=92s shares from stock exchanges such as BSE or
NSE. An exchange is also called the secondary market because in this
case, one buys/sells stocks from other investors.
Bond Basics
What are bonds?
A bond is a loan for which the subscribers are the lenders. The
organisation that sells a bond is known as the issuer.
The issuer of a bond must pay the investors interest at a
predetermined rate and schedule for the privilege of using their
money.
Debt versus equity
Bonds are debt, whereas stocks are equity. This is the important
distinction between the two securities. By purchasing equity (stock)
an investor becomes an owner in a corporation. Ownership comes with
voting rights and the right to share in any future profits. By
purchasing debt (bonds) an investor becomes a creditor to the
corporation (or government). The primary advantage of being a creditor
is that an investor has a higher claim on assets than the
shareholders: that is, in the case of a bankruptcy, a bondholder will
get paid before a share holder. On the other hand, a bondholder is not
eligible for a share of profits if a company does well - he or she is
entitled only to the principal plus interest.
To sum up, there is generally less risk in owning bonds than in owning
stocks, but this comes at the cost of a lower fixed return.
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