Find your subject
in our database of
Spark your creativity...
an impressive essay!
Since 1926, the average annual return on stocks has exceeded 10%. The return on bonds has been 5% and on cash reserves less than 4%. If you invested $167 per month ($2,000 per year) for 25 years, you would have $221,581 at 10%, $99,450 at 5% and $85,860 at 4% earnings. With higher returns through the stock market, it is no wonder that more investors buy stocks and mutual funds each year. Although stocks offer the potential for higher returns over bonds and cash reserves, they also expose you to more risk, particularly in the short term. Remember that historical average returns do not assure future returns.
Stock is a security that represents ownership in a corporation. A bond, by contrast, is debt issued by the company, basically an IOU. Bondholders are lenders; stockholders are owners. In the event of trouble, bondholders have a superior claim, but they don't share in the company's success the way stockholders do.
When you buy company stock, you can make money in one of two ways: through dividends, or through price appreciation when you sell your shares. The dividend payment you receive reflects your share of the company's profits. Dividends are usually paid quarterly. However, some companies don't pay dividends at all. Whether or not you make a profit when you eventually sell your shares will depend on a variety of factors, including the company's success, whether its particular industry is doing well and whether the stock market is rising or falling (maximizing returns will be discussed in a later article).
There are two basic categories of stock, preferred and common. Preferred stock is a hybrid between debt (bonds) and equity (stocks) exhibiting characteristics of both. Preferred stock pays a fixed dividend, has a preferred claim over the common stock to the dividends of the company and is given preferential treatment if the corporation is liquidated. While the dividends are greater and more stable than common stock, price appreciation of preferred stock lags that of common stock. Note: Some companies do not offer preferred stock.
Common stock is the type that is purchased most often. Dividends paid to common stock holders can vary depending on company profits. The main benefit of common stock is through price appreciation.
Cyclical stocks - These are stocks of companies whose earnings tend to move in tandem with the economy's business cycles. Their earnings often suffer when the economy is in a slump, but rise steadily when the economy begins to recover. Steelmakers, automakers, homebuilders, paper mills and airlines are in cyclical industries. (Example - (GM): One year return on investment - 9%; five year return on investment - 130%; annual dividend yield 3%).
Defensive stocks - Defensive stocks are from companies whose earnings tend to remain fairly stable or perhaps even rise when the economy is slow. Food companies, beverage makers and
Terminology mentioned in this term paper
Names referenced in this report
Penny stocks, bonds, Phillip Morris,
Locations included in this paper
Health Conditions talked about in this research paper
FinancialMarketIndex referenced in this term paper
Standard and Poor,
Companies referenced in this term paper
GM, GE, Duke Energy, Intel, Sprint, AT&T, Exxon, IBM,
Keywords talked about in this term paper
stock, dividend, investments, common stock, One year, dividend yield, mutual funds, growth stock, penny stocks, tracking stock, preferred stock, stock market, company, blue chip stocks, investor, annual return, earnings, stock exchange, Investment Company Act, blue chips, corporation, securities, appreciation, money market fund, earnings growth, price to book ratio, capital appreciation, price to earnings ratio, stable, fair price, buying power, Duke Energy, cash, national company, basic categories, Sprint PCS, business cycles, legal claim, Pink Sheets, early retirement, voting rights, Electric utilities, investing, long run, debit cards, White Oak, standard and poor, lags, management style, stockholders,