There are so many words in the personal finance lexicon that it can sometimes feel impossible to keep up. That said, welcome to The Wealth Edit’s “Weekly Words,” where we introduce you to increasingly complex personal finance vocabulary words so your vernacular grows along with your personal finance knowledge. If you have any questions about any of these terms, reach out!
Stock
- A stock is a security that represents ownership of a fraction of a corporation.
- This entitles the owner of the stock to a proportion of the corporation’s assets and profits equal to how much stock they own.
- Units of stock are called shares.
- Corporations sell stock to raise funds to operate their business.
- Though there can be private sales of stock, stocks are bought and sold predominantly on stock exchanges.
- Stocks historically have outperformed most other investments over the long run.
Bond
- A bond is a fixed income instrument that represents a loan made by an investor to a borrower – typically corporate or governmental.
- A bond could be thought of as an IOU between the lender and borrower that includes the details of the loan and its payments.
- Bonds are used by companies to finance projects and operations.
- Owners of bonds are debtholders, or creditors, of the issuer.
Capital
- In a broad sense, capital is any thing that confers value or benefit to its owner – intellectual property like patents, machinery in a factory, or money, although capital is more often associated with cash that is being put to work for productive or investment purposes.
Thanks as always to our friends at Investopedia for helping us clarify these sometimes confusing terms. Stay tuned for more Weekly Words next week!
