A stock is an equity security that confirms the ownership of part of the business in the company that issued the stock. In other words, when buying a stock, an investor buys part of the business of the company that issued it.
What are the stocks?
In most cases, there are two types of shares: ordinary and preferred. In this case, an ordinary share gives the investor certain rights, for example, the right to participate in a meeting of shareholders or the right to receive a share of the company’s profit in the form of dividends. Preferred shares may take away some of these rights, but at the same time give other advantages. Suppose it takes away the right to vote at a meeting of shareholders, but at the same time dividends can be guaranteed on it or they can be higher than on an ordinary share.
Why do companies issue shares?
The fact is that the issue of shares is one of the easiest ways for a company to get financing without using borrowed funds. In other words, by issuing shares, the company takes money from the investor and does not acquire any obligations.
How can an investor receive stock returns?
In fact, there are several ways to generate income.
- The purchase of a large block of shares in order to seize part of the company or to obtain a place on the board of directors.
- Speculative trading in shares, that is, we buy cheaper, and sell more.
- Getting part of the profits from the company’s work in the form of dividends.
What are dividends?
Dividends are a share of the company’s income that it distributes among the shareholders of the organization. Dividends are not required. The decision on their payment is made first by the board of directors, and then it must be supported at a meeting of directors. The procedure for paying dividends is determined by the dividend policy of the company. It also indicates the purity of their payments. It can be once a year, six months, a quarter or once every nine months. Each company decides for itself. But here I want to say that, for example, in the US market dividends are paid every quarter. In Russia, many companies pay dividends only once a year.
What is a bond?
A bond is a paper confirming a loan agreement between an investor and the company that issued this bond. According to this agreement, the company is obligated to return the face value of the bond and the percentage for using its funds to the investor after a certain period of time.
Why should companies issue bonds?
The fact is that it is quite difficult for companies to get a loan from a bank. Firstly, you need to collect a large package of documents, and secondly, the company cannot affect the rate at which it will receive a loan. In this case, bonds come to the rescue. Firstly, for listing bonds on the exchange, a package of documents is needed less. Secondly, companies can issue bonds on their terms. In particular, in the event of any changes in the market conditions, the company may redeem the bonds ahead of schedule from the market.
What are the bonds?
Bonds can be divided by issuer, for example, government (OFZ), municipal and corporate.
They can be divided by type of coupon: fixed, variable, zero-coupon and with conversion.
In addition, the bonds may be depreciation (payment of part of the debt) or offer (early repayment). Accordingly, there are bonds without depreciation and without an offer.
How can an investor make money on bonds?
Here, practically the methods are the same as with stocks. In other words, you just buy a bond and get a coupon. Either you buy a bond below par and then either sell it at a higher price or wait for the bond to pay off when it is paid off at par and you can earn extra money. When buying at par, you need to understand what exactly the bond is attached to. And in this case, you can most accurately say at what points the price of bonds will sag, and at what points it will rise.
Having got acquainted with bonds, we smoothly move on to getting to know the latest asset – this is ETF.
ETFs stand for Exchange Traded Fund or a fund that is traded on an exchange. In essence, an ETF is a portfolio of securities that follows the dynamics of a particular index, sector of an economy, or a specific country.
This portfolio is collected by an investment fund and managed by a professional manager. Having collected the portfolio, the fund issues it to the stock exchange, where the ordinary ordinary investor can actually buy it.
It should be noted that in addition to the commission for the purchase and sale of ETFs, a commission for the asset management fund is also paid.
If you are interested in investing in ETFs, you will be wondering which fund to choose. After all, ETFs are traded both on the Moscow Exchange and on American exchanges.
From ourselves we can say that there is a significant difference between them. So, for example, most funds pay dividends, while none of the funds on the Moscow Exchange pay them, but simply reinvest. In addition, there is a difference in the commissions. For American ETFs, it is very small, and for Russian ETFs it can reach 1% of the value of assets. Therefore, it is best to buy American ETFs.
How can an investor receive ETF income?
If you buy American ETFs, then you can receive income both from the growth of its value, and from dividends.
If you buy ETFs on the Moscow stock exchange, you can only receive income in one way — sell it when their value rises.