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Learning the fundamentals of the stock market and how companies raise capital.
What if you could hire the world's smartest CEOs to work for you, or act as the bank for the entire U.S. government? Every time you buy a stock or a bond, you are doing exactly that.
When a company wants to grow—perhaps to build a new factory or develop a new app—it can sell pieces of itself to the public. These pieces are called stocks or shares. When you buy a stock, you become a shareholder, meaning you own a tiny portion of that corporation. If the company's value increases, your share of the 'pie' becomes more valuable. However, if the company fails, your investment could disappear. Companies also sometimes share their profits directly with shareholders through payments called dividends. Essentially, stocks represent equity, or ownership, in a business venture.
Imagine you buy 10 shares of a tech company called 'CloudNine' at 65 per share.
1. Calculate initial cost: 2. Calculate current value: 3. Calculate profit:
Your total profit is .
Quick Check
If you own 100 shares of a company that has 1,000 total shares, what percentage of the company do you own?
Answer
10%
Unlike stocks, bonds do not give you ownership. Instead, a bond is a debt security. When you buy a bond, you are essentially acting as a bank and lending your money to a government or a corporation for a set period. In exchange for this loan, the issuer promises to pay you back the original amount (the principal) on a specific date (the maturity date), plus regular interest payments known as coupons. Bonds are generally considered 'fixed-income' investments because the payments are predictable and legal obligations of the borrower.
You purchase a $1,000 government bond with a 4% annual coupon rate that matures in 5 years.
1. Calculate annual interest: 2. Total interest over 5 years: 3. At the end of year 5, you receive your $1,000 principal back plus your final interest payment.
Total money returned: .
Quick Check
What is the main difference between the role of a stockholder and a bondholder?
Answer
A stockholder is an owner of the company, while a bondholder is a lender to the company.
In the world of finance, there is a direct relationship between risk and return. Historically, the stock market has offered higher average annual returns (around 10%) compared to the bond market (around 4-5%). However, stocks are much more volatile, meaning their prices can swing wildly in a short time. Bonds are typically more stable and provide a safety net, but they grow your wealth more slowly. Investors use a mix of both to balance the desire for growth with the need for security.
Compare two $10,000 investments over 20 years. Investment A (Stocks) grows at 8% annually. Investment B (Bonds) grows at 4% annually.
Using the compound interest formula : 1. Stocks: 2. Bonds:
While the stocks ended with over double the money, the investor had to endure much higher price fluctuations along the way.
Which investment type makes you a partial owner of a corporation?
What is the 'principal' of a bond?
Historically, bonds have provided higher average annual returns than stocks.
Review Tomorrow
In 24 hours, try to explain the difference between 'equity' and 'debt' to a friend or family member.
Practice Activity
Look up the current stock price of a company you like (e.g., Disney or Nike) and find the 'Yield' or 'Coupon' of a 10-year U.S. Treasury Bond to see real-world rates.