When you start to learn about the financial markets, one of the first things to understand is that when people talk about equities, they are talking about stocks. When they talk about fixed-income securities, they mean bonds. The stock market is also called the equities market, and, in some places, the shares market. Similarly, the bond market is also called the fixed-income market or the debt market.
The word "equity" means ownership, which is why it is associated with stocks. When you buy stock, you own a share of the company. This is why stocks are also called "shares." When you are a stockholder, you participate in the success of the company through the market price of the share. Your share of ownership also entitles you to vote when the company issues a ballot of candidates for its board of directors, and to vote on important actions, such as whether to issue more shares, or whether to accept a buy-out offer from another company.
Why Buy Stock?
Most investors buy stock because they think the company will be successful and the stock market will trade the dollar price of the shares higher. For example, when the company announces good news like a big contract, investors buy the stock because they expect this contract to bring in higher earnings. When more people want to buy the stock than want to sell it, the stock price goes up. When the company announces its earnings, if they are higher than expected the stock price goes up. If the earnings are disappointing, investors sometimes sell their shares and the stock price goes down.
Bonds are called fixed-income investments because they pay a certain amount of interest every year. They are loans the investor makes to an issuer, such as the U.S. Treasury or a big company, expecting to get paid back the money loaned by a certain date, plus interest. The date the loan must be paid off is called the "maturity date." Most bonds pay interest twice a year. The "coupon rate" of a bond is the amount of interest to be paid annually, so XYZ Company's 5-percent bonds due January 15, 2025, pay $50 a year interest for each bond with a $1,000 face value. Since they pay every six months, the actual payments are $25 each. On January 15, 2025, the investors receive their $1,000 per bond back and the loan is paid off.
Why Buy Bonds?
The interest your bond pays is called "income," and you know how much you will receive each six months because it is fixed, or set, when the bond is issued. The way this is done is by stating a coupon rate for the bond. You would buy bonds to receive the interest income and you would normally hold the bond until it matures and returns the $1,000 you originally paid, or loaned to the issuer. When the bond matures, the loan has been paid off and you will receive no more interest income from that bond.
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