1.6.6 Stock & Bond Markets
Completion requirements
When a company issues stock, it is selling pieces of itself in exchange for cash. Stock sales are sometimes referred to as equity sales. A bond is a contract stating a person has loaned the issuer (often the government), a specific amount of money that will be repaid with interest on a specific date (the
maturity date).
Economists and central banks use stock and bond prices as indicators of economic strength. Stock and bond returns also affect personal income. When a company has a successful year economically, it may pay dividends to stockholders. When an economy is strong, bonds have higher rates of return and bondholders earn more interest.
| Stocks |
Bonds | |
| High-risk investments
No maturity date, can be sold at any time Low transaction fees (the costs of selling) Rising stock prices indicate increased investment in business No guaranteed return (stock can become worthless, or the return can be high) |
Low-risk investments
Difficult to sell before before the maturity date High transaction fees (the costs of selling) When interest rates go UP, bond prices go DOWN Guaranteed return, but the return is usually low |
Economists and central banks use stock and bond prices as indicators of economic strength. Stock and bond returns also affect personal income. When a company has a successful year economically, it may pay dividends to stockholders. When an economy is strong, bonds have higher rates of return and bondholders earn more interest.