Navigating the risks and accessing the potential rewards that come with investing in stocks and bonds is much easier with experienced guidance. Navy Federal Financial Group can help you select options that match your investor profile, taking into consideration your goals, timeline and acceptable risk.
Stock is an equity investment. When you purchase a share of stock, you become a partial owner of that company—a stockholder or shareholder. Stock ownership allows you to share in any profits and growth in the company.
Investors typically purchase stock for two reasons: growth and income. Stocks offer strong potential to increase in value and stay ahead of inflation. Over time, the stock market tends to rise in value, though the prices of individual stocks rise and fall daily. Some stocks also pay dividends, which provide regular income to help fund a retirement or pay for more investing to grow your portfolio. There are two main types of stocks:
- Common stock is the most commonly traded type of stock and entitles owners to vote at shareholder meetings and receive dividends. When you read or hear about stocks being up or down, it always refers to common stock.
- Preferred stock usually doesn't come with voting rights. However, preferred stock stockholders receive dividend payments before common stockholders do, and have priority over common stockholders if the company goes bankrupt and its assets are liquidated.
Though stocks have historically performed well over the long term, there's no guarantee that your stock will produce higher returns or any returns on your investment. Understanding the factors that contribute to risk help you make sound investment decisions and keep losses to a minimum. Here are some factors to be aware of:
- Actions of investors If a large number of investors believe that the nation is entering a recession, their actions can affect the direction of the stock market.
- Business conditions: A new patent, an increase in profits, a pending merger or litigation could affect investor interest and stock prices.
- Economic conditions: Employment, inflation, inventory and consumer spending influence the potential profit of a company and its stock price.
- Government actions: Decisions on interest rates, taxes, trade policy, antitrust litigation and the budget impact stock prices.
- Global economy: Changes in foreign exchange rates, tariffs or diplomatic relations can cause stocks to go up or down.
Bonds are a debt security, much like an I.O.U. When you buy a bond, you're loaning money to a bond issuer, such as a corporation, government or municipality. In return for your investment, you receive regular interest payments, usually based on a fixed annual rate, until a stated maturity date is reached. Bonds are affected by interest rates, so the price of bonds can increase or decrease based on current interest rates. At maturity, you are paid the bond's full face amount.
Investors purchase bonds for income, safety and diversification. Typically, bonds pay interest semiannually, which means they can provide a predictable income stream. If bonds are held to maturity, bondholders get back the entire principal, so bonds are a way to preserve capital while investing. While bonds aren't risk-free, they tend to be less volatile than stocks and can stabilize the portfolio values when the stock market struggles.
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