Personal Finance is teaching us a variety of topics and investments has been our area of study for this week and herein under scrutiny today, are the features of stocks, bonds and how they are traded. Also included are how to calculate the annual rate of return and some actual calculation examples.
a. What are bonds? What are their features and how are they traded?
Stocks and bonds are different, and accordingly are purchased and sold in distinctive markets. Bonds are different from stock in that a bond is a loan to a company or a government. Moreover, bonds function differently from stocks, a bond has a principal (the initial invested amount of loan) it has a yield or interest rate and it has a maturity date, which determines how long the…show more content… Consequently, investing in a business that has a proven track record is the best strategy, investing in an unproven organization is called speculating. Moreover, researching the corporation before purchasing stock is recommended to understand all risk associated with this endeavor. In addition, stocks pay out dividends from time to time based on excess income earned by the organization, the executive board determines when the corporation pays out dividends and when returns will be reinvested (Investopedia Staff, 2014)…show more content… Moreover, the only way to purchase stocks is through a broker, subsequently, you can 't just walk into a marketplace and buy stocks, it 's a process to become a member. Consequently, using a broker is the best method and there are plenty of avenues to find one, in addition, with the innovation of the internet, buying stocks online has become commonplace, with individuals becoming day traders, meaning all stocks are sold at the end of the trading day and start fresh the next morning. However, choosing a broker can be difficult, but remember full service brokers will dispense advice about choosing stocks and other possible investments which is not the norm with an online broker (Investopedia, 2005).
How do you calculate an annual rate of return?
The formula to calculate annual rate of return is as follows:
[Income + (Ending Value – Original Value)] ÷ Original Value = % Rate of Return (Siegel & Yacht, 2009, p.232)
First figure out the gain or the difference between the ending value and original value. Then add the income to that and divide it by the original value. This gives you the annual rate of return.
You buy a share of stock for $100 and it pays no dividend. A year later the market price is $105. What is the rate of