Definition of a Stock

• Stock is a form of ownership. One share of stock represents one unit of company ownership. Stockholders have rights as owners of a company. They have the right to vote at annual meetings for the board of directors and other issues which may be presented at the meeting. Stockholders have a right to share in corporate assets and earnings. Shareholders can buy and sell their shares in the open market on a stock exchange.
  
  

The Risk of Owning Stock

• The stockholder takes a risk when buying stock in a company. If the company does well and the stock increases in value, the stockholder makes money. The stockholder shares in corporate earnings in the form of dividends. If the company performs poorly and the stock price decreases, the stockholder can lose money. If the company is forced to liquidate, declare bankruptcy or restructure, common shares of stock usually turn out to be worthless.
  
  

Types of Stock

• Common shares of stock are the most widely issued form of stock. Some companies issue two classes of stock: Class A and Class B shares. Class A shares usually have more voting rights than the one vote per share of common stock. Class B shares may have the traditional one vote per share voting rights, or no voting rights. Preferred stock is issued at a set price and offers a dividend. The dividend does not change. Preferred shareholders have a senior claim on the assets and earnings of a company if the company goes out of business.
  
  

Definition of a Bond

• A bond is a form of debt. Bondholders lend money to an entity and in return collect interest payments and eventually receive the principal originally loaned. Short-term bonds mature in less than two years. Medium-term bonds mature in two to 10 years, and long-term bonds mature more than 10 years from the date of issue.
  
  

Bond Issuers

• Companies, organizations and governments borrow money because they require funds to continue operations and finance particular undertakings. The federal government borrows money to fund programs and cover revenue shortfalls. Municipalities borrow money for schools and transportation projects. Corporations need money to build plants, acquire other companies, hire employees, fund research and continue operations during periods of underperformance and reduced revenue. Banks use the money to lend to their customers for mortgages, auto loans, personal loans, commercial loans and lines of equity.
  
  

Stockholder vs. Bondholder

• A stockholder buys stock and becomes one of many owners of a corporation. A bondholder lends money and holds the debt in the form of a bond. Stockholders may participate in the success of a company through stock price appreciation and dividends. Bondholders receive a stated interest rate and their principal returned when the bond matures.