Shares and Bonds: Definitions, Interesting Facts.
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    Shares and Bonds: Definitions, Interesting Facts.

    INTRODUCTION TO SHARES AND BONDS



    When it comes to investments opportunities, people have really asked about the right type of investment they can put their money into. There are lots of investment opportunities ranging from shares, bonds, forex, Cryprocurrencies and much more out there.
    These are kind of investments that have huge potentials to turn our investments into profit making business which is what every investor would likely cherish or aspire to achieve.



    In this very article I will elaborate more on the two known types of investment options known as the Shares and Bonds, what they meant, and how profitable or risky these investments can be for investors.
    For this article, more research where carried out with the help of Google search engines which directed me to different sites where major points about shares and bonds where picked out and assembled to create a life out of this article.

    I believe by the end of this article, we can know the difference between shares and bonds, likewise understand what this type of investment is all about, and how we could key into this investment opportunity. I would look further to assemble more interesting facts about this shares and bonds to see we have the very point to which we can know if this is the very type of investment we can hope for now and in the future.

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    DEFINITIONS: (SHARES AND BONDS)


    SHARES : According to the business dictionary definition, a share is a unit of ownership that represent an equal proportion of a company's profits and an equal obligation for the companies debts and losses.
    Investopedia stated that shares are units of ownership interest in a corporation or financial assets that provides for an equal distribution in any profits, if any are declared, in the form of dividends.

    More research towards Wikipedia tells us that a share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder.

    From all the definitions above, I will summarize that shares are valuable units and when an investor buys a share of a company, it gives that investor the rights to receive his own percentage of the company's profits and also his own share of loss when a company makes loss.

    SHARES CAN BE CATEGORIZE IN TWO PARTS NAMELY

    a) Ordinary Shares or the common stock : These are the type of shares where an investor or a shareholder share in the company's earnings and also vote at the company's annual general meetings or official meetings.

    b) Preferred Shares also known as the Preferred Stock: Here the shareholder gets a fixed periodic income of interest but do not have the power to vote.



    BONDS


    Investopedia defined bond as a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows funds for defined period of time at a variable or fixed interest rate.
    The financial dictionary sees bond as debts, issued for a period of more than one year. It also stated that bonds are in fact loans that you and other investors make to the issuers in return for the promise of been paid interest, usually but not always at a fixed rate, over the loan term.

    Furthermore National association of securities dealers automated quotations exchange (NASDAQ), also agreed with the financial dictionary which stated that bonds are debts issued for a period of more than one year. Where the seller of the bond agrees to repay the principal amount of the loans at a specific time.

    From my personal understanding from all definitions, I realized that bonds are said to be those money which you as an investor will be willing to give out to entities like companies, municipalities, governments for some period of time with an assurance of gaining an agreed fixed interest on your money.

    From the image below we can see how bonds are categorized.


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    HOW SHARES & BONDS WORKS



    1. SHARES FORMALITIES

    An investor buys a stock from a company, this stock is a piece of the company. However when a company wants to raise money, it issues shares to the public which is done through the initial public offering (IPO) in which a price of shares is set based on the estimated worth of the company. Through this way the company raises money from investors to grow their business while those shares this investor received are traded in an exchange.

    Now you will ask, why do investors buy shares?
    These investors will continue to trade these shares because the value of these stocks or shares changes. They either make profits or loose money through this trading of buying and selling of stocks or shares.
    The goals of investors buying shares is to make profits when the company they purchase those shares from, keep doing well in the market. So in essence, when you buy shares, you own a piece of the company and if that company does well, you get to also make money as a shareholder of the company.

    THE SELLING OF SHARES:


    Now you could wonder what will make an investor sell his shares. This is very thoughtful of you my reader. Like forex trading there must be a buyer and a seller, this same thing is applicable to stocks or shares transactions.
    Assuming you buy 500 shares of stock, someone else must have sold it to you. So in this scenerio the buyers and sellers are pushing the prices up and down.

    For example, when a stock or share keep falling, it shows that sellers are more agressive because they are willing to sell at lower prices while buyers are very hardened and would also prefer to buy at lower prices too. In this case the price will keep falling until buyers steps in and become more agressive and willing to buy at higher price. This then pushes the price in a bullish direction.

    I know you must have thought why would these investors buys and sells at the same time?.
    The answer is simple. Investors don't have same agenda in the stock market which makes it easy for them to buy and sell at different times. Some investors could have bought at high price at a point and maybe the pressure of the falling market could make them to sell low and cut their losses.




    2. BOND FORMALITIES


    We all know that business needs loans to fund operations. Government need loans to fund projects, companies needs loans to grow and so much more. These agencies will need a good amount which could surpass what banks might lend to them. This is where investors comes in to fund these agencies and get bonds from these agencies.

    If we go back to our definition about bond, we will see that its a fixed income investment in which investors loans money to an entity that borrows those money for a defined period of time with a promise of giving investors a fixed income rate. So you can see that the concept of bond is simple and less risky unlike shares.
    Bonds can also be traded. If you sell a bond at a price lower than the fixed value, it's said that you are selling at a discount. If sold at a price lower than its value for a defined time, we are selling at premium.

    THINGS TO LOOK OUT FOR BEFORE SELECTING A BOND



    It's necessary when selecting a bond, you read towards the agreement and the know the kind of bond you are likely to accept or work with.

    a) Maturity : Some bonds can last from one month to many years. You must know this and understand what bond would fit your description.

    b) Callability : Here the company or entity who issued an investor bonds have the right to call back these bond at anytime of their choice

    c) Put provision: This gives the investor the opportunities or right to call off the bought bonds and have a chance to sell it back at the face value before maturity.

    d) Convertible Bonds: Some bonds can be converted to stocks or shares in the company that issues those bonds.

    e) Secured Bonds: This is a bond where investors are backed by collateral which means the entity have collateral they could give to investors who buys these bonds when the entity goes bankrupt.

    f) Unsecured Bonds : These are debentures and not backed by collateral. Example of these are government bonds.

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    There is a Conspiracy Theory that states shares are used to control companies by bankers who own a large amount of their shares (thus enabling them to manipulated the shares' prices to some extent).
    And indeed ownership structure of many companies shows more than half of their shares owned by a few banks and funds, who also own most of each other's shares, thus pointing to single group ownership, although identities are not revealed.
    With banks it's even worse - post-WW2 macroeconomics links capital requirements with total shares value. Two years ago there was a case with an Italian bank where shares price suddenly dropped and the bank was forced to take extraordinary loans by bigger banks under quite suspicious circumstances.

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    Quote Originally Posted by Doge View Post
    There is a Conspiracy Theory that states shares are used to control companies by bankers who own a large amount of their shares (thus enabling them to manipulated the shares' prices to some extent).
    And indeed ownership structure of many companies shows more than half of their shares owned by a few banks and funds, who also own most of each other's shares, thus pointing to single group ownership, although identities are not revealed.
    With banks it's even worse - post-WW2 macroeconomics links capital requirements with total shares value. Two years ago there was a case with an Italian bank where shares price suddenly dropped and the bank was forced to take extraordinary loans by bigger banks under quite suspicious circumstances.

    Thank you Doge for your reply to this ongoing article. These conspiracy which you talked about is somehow very true because in the stock market, there are manipulative procedures that can increase a share price or make a share price to fall. When a firm have large quantities of a company shares, this easily make them powerful and easily make retail traders powerless to create feedback loop that could drive the share price up.

    These large firms that have almost half of the company shares are the institutional investors. Assuming they decide to dump the stock share of the company, the price will naturally fall. Other investors might panic and would rush to sell too thereby making the price of the share to keep falling.

    However, if the institutional investor decide to be agressive and start buying back the company shares, other investor will notice that price have begin to rise and join to buy, which will keep pushing the price up. This cycle will continue once it reaches a high price point.

    I know you will ask, why is it so?


    This happens because those institutional investors like bank's you mentioned have a huge purchasing power, have the ability to drive price down and will buy them back again at low price. They do this and make lots of profits.

    My advice for individual or retail traders would be that they should be patient and do not make uncalculated move. These huge investors could create panic for retail traders, but you must study the market and be patient for the right growth.
    Also retail traders should consider their transaction cost before making any trading decisions and if they have already make profits, they could look to sell some of their shares when they suspect that these large institution are manipulating the stock. It will help them capture some part of their profits.

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    nice article as usual, sis. actually i never participate to any shares trading or bonds and it seems like they won't attract me at all because my heart lies on forex market. those price manipulations i think it's common to see in this business and yet we don't have such power but try our best to work on our analysis to follow market where it wants to move. maybe someday once we become bigger than now, we'll know how it feels like to contribute something to market and move it a little.

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    It doesn't even need that much volume to move the market, especially relatively low liquidity ones like shares and bonds.
    I recently wrote a code that generates random ticks and builds a chart from them (seeing these charts is really eye-opening by the way, as there are way too many similarities with real charts and looking for differences does provide new ideas to generate profits). Changing probability of tick direction by 1 or 2 percent resulted in massive trends, on both small and bigger timeframes. Manipulating similar percentage of daily volume would probably have the same result on real markets.

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    Quote Originally Posted by Sascha View Post
    nice article as usual, sis. actually i never participate to any shares trading or bonds and it seems like they won't attract me at all because my heart lies on forex market. those price manipulations i think it's common to see in this business and yet we don't have such power but try our best to work on our analysis to follow market where it wants to move. maybe someday once we become bigger than now, we'll know how it feels like to contribute something to market and move it a little.
    Thank you Sascha for dropping by. I think if you understand so much about forex business trading, you would not find it difficult from picking up in shares and bonds. Infact forex have lots of similarities with the shares because we are all traders trying to buy and sell at the very right time. With what I have explained in the share formalities, you will see those concept happening too in the forex market where huge banks, government policies could drive the market. Yes retail traders can be powerless but once they are smart enough, they could always think about the current trend of the market and follow them. I also do hope that someday you will become bigger to drive this market but you need lots of money. Lol

    Quote Originally Posted by Doge View Post
    It doesn't even need that much volume to move the market, especially relatively low liquidity ones like shares and bonds.
    I recently wrote a code that generates random ticks and builds a chart from them (seeing these charts is really eye-opening by the way, as there are way too many similarities with real charts and looking for differences does provide new ideas to generate profits). Changing probability of tick direction by 1 or 2 percent resulted in massive trends, on both small and bigger timeframes. Manipulating similar percentage of daily volume would probably have the same result on real markets.
    So amazed to see you are a good coder and have come up with your tool which gives you the concept of how to generate this ticks you talked about. Am impressed on your ability to try new things Doge and I guess you have learnt from this experiences of yours. And from what I understand from your codeing results, it means the market revolves around this direction. Good one.

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    SHARES AND BONDS: RISK AND REWARD RATIO


    From our explaination between shares and bonds we could see they are all forms investment and every investment carries it's own risk. Also every type of investment give chance for a profitable earnings which is the main attractiveness of investing. First let's me start up with the shares risk and reward.

    A). SHARES PROFITABILITY AND RISK

    Reward ratio : You make money from shares when the company grows. In essence when you buy a share of a company, you automatically invest in their business. So if the company grows, it drives up the value of the stock that when you decide to sell your stock shares, you receive more profits over time than what you paid.

    Again there is something called dividend. This is when a company distributes parts of its profits to its shareholders. Assuming a company made $1 million profits, they keep half of the profits and distribute the other half to their shareholders depending on the amount of share you have or have bought.

    Risk ratio: No doubt you will loose money when the company you bought it's shares do not grow or fail in their business. In this case you might be forced to sell up your shares in loss or still loose your investment.



    B). BOND PROFITABILITY AND RISK

    Reward ratio : You will make money from the fixed income rate of your investment. So assuming an entity promised 20 percent of your investment after a fixed time frame of 2 years and you invested $1000, you expect $1200 after maturity is fulfilled.

    Risk ratio : Bond comes with a fixed rate for a particular period of time. But when the market interest rate rises from the date of the bond purchase, the bond price will eventually fall. These market interest rates are known to be inflation rate ( high increase of price in the overall goods and services), government monetary and fiscal policies, demand and supply of money in the economy and much more.
    So in essence it means that the $1000 of last year that you invested in bonds might be a value of $700 this year due to these unforeseen market interest rate. So you see even with the 20 percent gain on your investment of $1000 you still made loss. Reason is that your returns which would have been $1200 dollar would value at $840. You would see how these market interest rate affected your profits even that you got 1200$ back but the purchasing power last year and this year was never the same.

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    DIFFERENCES BETWEEN SHARES AND BONDS




    SHARES & BONDS

    1. Shares attracts profits only when the company grows. While Bonds attracts profits on a fixed interest rate

    2. Shares are financial assets. While Bonds are debt security

    3. Shares are issued by companies. While Bonds are issued by government institutions, financial Institutions, companies and more.

    4. Shares means equity and this means a shareholder have a part ownership in a company. But Bondholders have no stake in the company and are lenders to the company or government.

    5. Shares can be volatile but it could also give higher returns. While Bonds are safer but pays lower fixed returns.

    6. As long as a company last, shares remains available. While Bonds are always for a limited time period

    7. Shares returns are not guaranteed but Bonds returns are guaranteed

    8. Shares are centralized. While Bonds are over the counter

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