When it comes to financial securities investment, stocks and bonds matter a lot.
And in today's post, I'll be helping you understand stocks and bonds. What they really are.
Occasionally, we see a company growing very fast. And its bankers advise it to float an IPO (Intial Public offer). They come up with a mind-numbing valuation of the company and break it down into million units of shares. They sell a part to the public, you and me. Every share of the company you buy is a portion of the company. If you are extremely rich, you can decide to buy all the company's shares and make it your family business. That's if the board of directors let you.
Buying a company's stock is owning part of the company, it's like becoming a limited partner with less legal rights.
Then when the same company sees a huge business opportunity and wants to quickly cash in on it, it may float bonds for the public to buy. Bonds are like loans, [often] from the small guy to the big guy. You as an individual are lending money to a multi-billion naira company. And that's simply what buying bonds is.
Now to the less obvious.
We can break down the ownership of a publicly traded company into three different classes --
- Bond Investors
- Preferred Stock Investors
- Common Stock Investors