Answer:
Step-by-step explanation:
1. If you buy a company’s stock,
A. you own a part of the company.
2. If you buy a company’s bond,
B. you have lent money to the
company.
3. Over the past 70 years, the type of
investment that has earned the most
money, or the highest rate of return, for
investors has been
A. stocks.
When you own stock, you own a part of
the company. There are no guarantees of profits,
or even that you will get your original investment
back, but you might make money in two ways.
First, the price of the stock can rise if the
company does well and other investors want to
buy the stock. If a stock’s price rises from $10 to
$12, the $2 increase is called a capital gain or
appreciation. Second, a company sometimes pays
out a part of its profits to stockholders—that’s
called a dividend. If the company doesn’t do
well, or falls out of favor with investors, your
stock can fall in price, and the company can stop
paying dividends, or make them smaller.
When you buy a bond, you are lending
money to the company. The company promises
to pay you interest and to return your money on
a date in the future. This promise generally
makes bonds safer than stocks, but bonds can be
risky. To assess how risky a bond is you can
check the bond’s credit rating. Unlike
stockholders, bond holders know how much
money they will make, unless the company goes
out of business. If the company goes out of
business, bondholders may lose money, but if
there is any money left in the company, they will
get it before stockholders.
If you had invested $1 in the stocks of
large companies in 1925 and you reinvested all
dividends, your dollar would be worth $2,350 at
the end of 1998. If the same dollar had been
invested in corporate bonds, it would be worth
$61, and if it had been invested in U. S. Treasury
bills, it would be worth $15. (This information
came from Ibbotson Associates, Inc.)
One of the riskiest investments is buying
stock in a new company. New companies go out
of business more often than companies that have
been in business for a long time. If you buy
stock in small, new companies, you could lose it
all. Or the company could turn out to be a
success. You’ll have to do your homework and
learn as much as you can about small companies
before you invest. If you decide to buy stock in
a new or small company, only invest money that
you can afford to lose.
One of the most important ways to lessen
the risk of losing money when you invest is to
diversify your investments. It’s common sense
— don’t put all your eggs in one basket. If you
buy a mixture of different types of stocks, bonds,
or mutual funds, your entire savings will not be
wiped out if one of your investments fails. Since
no one can accurately predict how our economy
or one company will do, diversification helps you
to protect your savings.