Securities 101: Do You Know the Difference Between Stocks & Bonds?
NASHVILLE – With many surveys showing that younger Americans are hesitant to participate in the stock market, the Tennessee Department of Commerce & Insurance’s (TDCI) Securities Division wants to help and encourage young adults to learn the basic concepts of stocks and bonds and understand how early investment gives money time to grow.
The financial outlook of many millennials, a term usually considered to apply to individuals who were born after 1980 and reach adulthood with the turn into the 21st century, has been heavily shaped by their coming of age during the Great Recession. According to research from Deloitte, less than 30% of millennials’ wealth is invested in stocks. Contrary to the previous generation, they prefer physical assets as well as cash and demand simple, clear and straightforward products.
As millennials move to Nashville and other Tennessee cities in record numbers, TDCI urges consumers to learn more about how investments work and why they’re crucial to ensuring a stable financial future.
“We want all Tennessee investors – especially young people – to be wise beyond their years when it comes to how and where they invest their hard-earned money,” said TDCI Assistant Commissioner for Securities Frank Borger-Gilligan. “While investing can seem intimidating, by brushing up on basic investment terms and processes you can better position yourself to make sound financial decisions and build a solid foundation to save for retirement.”
The TDCI Securities Division shares the following information to help young and beginner investors understand the difference of stocks and bonds.
STOCKS
Stocks are shares of ownership interest in a publicly traded company. As an owner, you share in the company’s triumphs and failures. Future income can come in two ways: (1) dividends and/or (2) capital gains. Dividends are when companies share their profits with stockholders in the form of money or more stock. On the other hand, a capital gain is the increase in the value of a stock so that it is worth more than its original purchase price. The gain is not recognized until the asset is sold. Bottom line is if the company does well, your stock will appreciate. If the company does poorly, the value of your investment will decrease.
BONDS
On the other hand, bonds are effectively loans to a company or a government. In exchange for the loan, the corporation or government promises to pay you back in full, with regular interest payments. The loan will be for a set period of time, which is called the term. Bonds are typically used to raise money for city or state capital improvements.
Because bonds have a better chance of generating a consistent income through the interest payments, they are less risky than stocks. But, greater risk typically means greater reward. If a company is profitable and financial stable, stocks can appreciate significantly.
TDCI encourages investors to always conduct thorough research to find the investment option that is best for you. If you plan to enlist the help of an investment advisor, contact us at 615-741-2947 to make sure that the professional you choose is properly licensed.
Additional investor education information is also available through the TDCI Securities Division website: https://www.tn.gov/commerce/section/securities.
If you suspect that you might be a victim of securities or insurance fraud, or if you would like to file a complaint or speak with an investigator, please contact the Tennessee Securities Division – Financial Services Investigations Unit at (615) 741-5900. To file a complaint online, visit /commerce/article/securities-file-a-complaint.
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