Stock typically
takes the form of shares of common stock (or voting shares). As a
unit of ownership, common stock typically carries voting rights
that can be exercised in corporate decisions. Preferred stock
differs from common stock in that it typically does not carry
voting rights but is legally entitled to receive a certain level
of dividend payments before any dividends can be issued to other
shareholders. Convertible preferred stock is preferred stock that
includes an option for the holder to convert the preferred shares
into a fixed number of common shares, usually anytime after a
predetermined date. Shares of such stock are called "convertible
preferred shares" (or "convertible preference shares" in the
United Kingdom).
Although there is a
great deal of commonality between the stocks of different
companies, each new equity issue can have legal clauses attached
to it that make it dynamically different from the more general
cases. Some shares of common stock may be issued without the
typical voting rights being included, for instance, or some shares
may have special rights unique to them and issued only to certain
parties. These case by case variations in the specific form of
stock issuance is beyond the scope of this article, except to note
that not all equity shares are the same.
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In finance, a bond is a debt security, in which the authorized
issuer owes the holders a debt and is obliged to repay the principal and
interest (the coupon) at a later date, termed maturity. Other stipulations
may also be attached to the bond issue, such as the obligation for the
issuer to provide certain information to the bond holder, or limitations
on the behavior of the issuer. Bonds are generally issued for a fixed term
longer than ten years. U.S. Treasury securities issue debt with life of
ten years or more, which is a bond. New debt between one year and ten
years is a "note", and new debt less than a year is a "bill".
A bond is simply a loan, but in the form of a
security, although terminology used is rather different. The issuer
is equivalent to the borrower, the bond holder to the
lender, and the coupon to the interest. Bonds enable the
issuer to finance long-term investments with external funds. Note that
certificates of deposit (CDs) or commercial paper are considered to be
money market instruments and not bonds.
In some nations, both terms bonds
and notes are used irrespective of the maturity. Market
participants normally use the terms bonds for large issues offered
to a wide public and notes for smaller issues originally sold to a
limited number of investors. There are no clear demarcations. There are
also "bills" which usually denote fixed income securities with terms of
three years or less, from the issue date, to maturity. Bonds have the
highest risk, notes are the second highest risk, and bills have the least
risk. This is due to a statistical measure called duration, where lower
durations mean less risk and are associated with shorter term obligations.
Bonds and stocks are both securities, but
the major difference between the two is that stock-holders are the owners
of the company (i.e., they have an equity stake), whereas bond-holders are
lenders to the issuing company. Another difference is that bonds usually
have a defined term, or maturity, after which the bond is redeemed,
whereas stocks may be outstanding indefinitely. An exception is a consol
bond, which is a perpetuity (i.e., bond with no maturity). |
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