Stocks, bonds and mutual funds(explained).

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A stock is a term used to describe ownership in a particular organization at times, it could be in percentage or full ownership.

A shareholder is a person who owns a stock.

Types of shareholders.

Common shareholders: A common shareholder is an individual, business, or institution that holds common shares in a company, giving the holder an ownership stake in the company. This will also give the holder the right to vote on corporate issues such as board elections and corporate policy, along with the right to any common dividend payments.

How one becomes a common shareholder.

A person or other entity becomes a common shareholder by buying at least one share of common stock of a company. That party is now a fractional owner of the company as long as they hold onto at least one share.

Common shareholders participate in the price movements in the stock which is based on how investors view the future outlook of the company and upon the company’s performance. If the price of the stock moves higher after purchase, this results in a profit for the buyer by way of a capital gain.

Common shareholders may also receive dividend payments from the company, which is a cash or stock payout. Not all companies pay dividends, but if a common dividend is declared all common shareholders are entitled to it and the cash or shares will automatically appear in the common shareholders trading account on the payment date.

  • Preferred shareholder: A Preferred shareholder is an individual or an entity whose securities represent ownership in a corporation, and have higher priority over common shares on the company’s assets and earnings. The shares are more senior than common stock but are more junior relative to bonds in terms of claim on assets. Holders of preferred stock are prioritized over holders of common stock in dividend payments.

Common terms used in stocks.

  • Moving Average Convergence Divergence: Moving average convergence divergence, or MACD, is one of the most popular tools or momentum indication.
  • Ipo: Initial public offering is the process by which a private company can go public by sale of its sto
  • Management Buy Out(mbo): Management buyout (MBO) is a type of acquisition where a group led by people in the current management.
  • Bullish Trend: A ‘trend’ in financial markets can be defined as a direction in which the market moves up or causing an increase in price of company’s stocks.
  • Stop Loss: can be defined as an advance order to sell an asset when it reaches a particular price point.
  • Return On Equity: The Return On Equity ratio essentially measures the rate of return that the owners of common stock get.
  • Dead Cat Bounce: a temporary recovery in share prices after a substantial fall, caused by speculators buying in order to cover their positions.
  • Iron Butterfly Option: The Iron Butterfly Option strategy, also called Ironfly, is a combination of four different kinds of
  • Hedge FundHedge fund is a private investment partnership and funds pool that uses varied and complex proprietaries.
  • Securities Based Lending: Security-based lending is the practice of raising a loan by offering your existing investments in stocks.

Bonds are fixed income instruments that represents a loan made by an investor to a borrower at times it could be a cooperate or a governmental body.

  • Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
  • A bond is referred to as a fixed income instrument since bonds traditionally paid a fixed interest rate (coupon) to debt holder’s. Variable or floating interest rates are also now quite common.
  • Bonds are units of corporate debt issued by companies and securitized as tradable assets
  • Bonds have maturity dates at which point the principal must be paid back in full or risk default.

Governments (at all levels) and corporations commonly use bonds in order to borrow money. Governments need to fund roads, schools, dams or other infrastructure. 

Read more on bonds.

Mutual funds

A mutual fund is a financial vehicle made up of funds collected from various investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. 

So, when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio’s value. Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual fund shares do not give its holders any voting rights. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding.

Learn more on mutual funds.

Author: Austine