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Stocks and bonds

By issuing and distributing the shares, government raises capital known as stock.


1. Definition of Stock

2. Kinds of stocks

3. Bonds

4. Kinds of Bonds


Stock may be defined as the aggregate of fully paid-up shares of a member merged into one fund of equal value. It is a set of shares put together in a bundle.

The stock is expressed in terms of money and not as so many shares. Stock can be divided into fractions of any amount and such fractions may be transferred like shares.

A company cannot make an original issue of the stock. A company limited by shares may, if authorized by its articles, by a resolution passed in the general meeting convert all or any of its fully paid-up shares into stock on conversion into stock, the register of members must show the amount of stock held by each member instead of the number of shares. The conversion does not affect the rights of the members in any way. A stock has no nominal value. A share has a distinctive number, which distinguishes it from other shares, whereas stock bears no such numbers. Stock may be of different denominations and can be transferred in any fractions.

Kinds of Stocks:

Stocks are of two kinds namely, (1) Equity (2) Preference. Even though, other kinds of stocks are available, they are not in practice nowadays.

Equity stocks: Generally, stocks which do not have any preferential right in the matter of payment of dividend or repayment of capital, are known as equity The dividend on equity stock mainly depends upon the profits (or) performance of the company, it is not constant (or) fixed every year. Board of Directors of the company recommends the rate of dividend. The right to vote is an important right available to equity stockholders.

Preference stocks: Preference shares are those shares which are entitled to a fixed preferential dividend, and in case of winding up of the company it must carry a preferential right to be paid.

Stocks can be evaluated by comparing how the companys

management is utilizing the resources available to the company. This measure of management effectiveness provides you with an idea of how well the company is being run relative to others in its sector and the market as a whole. You can also use different tools to compare companies in different industries. They are a) return on assets b) return on investment c) return on equity.

Stocks are mainly affected by two major factors namely, demand and supply. The stock market fluctuation is also depends on various factors that generally create market ups and downs. When demand for a companies shares that have a history of raising their dividend every year, and a systematic approach of adding more shares to the portfolio through the dividend reinvestments every quarter, plus having a simple savings plan with an opportunistic buying approach of adding even more shares to the portfolio every quarter, the company will make good progress and the companys share would be high demand.

When a stock is guaranteed in the stock market to go up, it may not so happen. Stock market is not certain, when someone guarantees certain performance out of a stock, the guarantee should be analyses effectively. To check into the company performance we should analyze with the help of companys past financial records.


A certificate of debt that is issued by a government or corporation in order to raise money and which normally carries interest. Bonds are generally issued for a longer period. A bond is generally a loan, but with certain conditions that acts as security to the holder. Bonds and stocks are both securities, but the main difference is that shareholders own a part of the issuing company, whereas bondholders are lenders to the company.

Bonds are issued by Government authorities, credit institutions, companies in the primary company. The most common process of issuing bonds is through underwriting. In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors. Government bonds are typically auctioned.

Generally, Bonds are bought and traded mostly by institutions like pension funds, insurance companies and banks. The individuals who want to own bonds would do through bond funds. Always as general practice or rule, bond markets will rise when stock markets fall. So only bonds are generally viewed by investors as safer investments to invest than shares or stocks, but it is only perception. In day to day operations bonds also suffer like shares with fluctuations in the market, and the interest payments of bonds are higher than dividend payments that the company would generally choose to pay to its shareholders. Bondholders also enjoy legal protection: under the law of most countries, if a company goes insolvency or bankrupt, its bondholders will receive money back, whereas the company's stock or share ends up with valueless.

However, any change or fluctuation in market changes in a bond immediately affect mutual funds hold these bonds. The institutional investors generally have to mark to market their trading books at the end of every day. If the value of the bonds held in a trading portfolio has come down over the day, the mark to market value of the portfolio may also have come down. This can be damaging for professional investors such as banks, insurance companies, pension funds and asset managers. If there is any chance a holder of individual bonds may need to sell his bonds and "cash out" for some reason, interest rate risk could become a real problem.

The bonds are of different types such as, convertible bonds, corporate bonds, fixed rate bonds, high yield bonds, zero coupon bond, inflation linked bonds and so on.

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