Investing in stocks and bonds Term Paper Example | Topics and Well Written Essays - 750 words

Investing in stocks and bonds - Term Paper Example Consequently, the value of stock for that corporation tend to reflect the corporation’s earnings and experiences, going up when it is profitable and down when the company is experiencing losses. In essence, the higher the return potential, the higher the amount of risk associated with the stock. For example, investors in stock expect a high rate of return since they do not have a set schedule for repayment or fixed rate of return such as those in fixed-income securities. Even within this world of stocks, variations do exist in reward and return (Tyson, 2011). Blue chip stocks refer to stocks issued by corporations, which are firmly established within their given industries and possess a long history of paying dividends and producing earnings. Small capitalization stocks refer to shares from companies that are not that well established but have tremendous potential for growth. This can translate into a significant return for the investor. However, this comes with an increased potential for a greater decrease in value than would be expected from, say, a more established company. Bonds, on the other hand, involve making loans to corporations and other entities by investors (Wyckoff, 2009). Other entities normally involve various branches of the government that issue bonds to attract injection of capital without giving the investor managing control. In effect, the holder of the bond holds an IOU. If we were to invest in bonds, we would not expect any share in profits and would get a fixed investment return. This return is an interest rate on the bond and is also referred to as the coupon rate. It is calculated as the total percentage of the initial offering price of the bond. Bonds, just like common stocks, have a fluctuating market value, and if they are sold before their maturity date, they could produce a loss or gain in principle value (Wyckoff, 2009). If we were to invest