The Stock Market, Stocks, and Bonds

The stock market is a free-access market for investors to trade capital and equity shares of public corporations. Exchanges are regulated by the Securities and Exchange Commission (SEC). The New York Stock Exchange and Nasdaq are one of the biggest stock exchanges. 

Over-the-Counter (OTC) is a broker-dealer trade that can use equities, derivatives, and financial instruments that stock exchanges may not have. OTC stocks can be traded directly without exchanges, and companies can raise capital by selling them. Equities that are listed in exchanges and stocks that may not meet the requirements of exchanges (OTC equity securities) can also be bought over the counter. 

The two most common types of investment are stocks and bonds.

Stocks:

• Stocks are essentially shares of a company. Businesses can use the stock market to receive investments and expand. When a business introduces a share to the stock market, it is known as an initial public offering (IPO). Stocks are also known as equities. 

Bonds:

• Bonds are essentially the debt of a company. Businesses can make a loan with the public and investors to borrow money and return it with interest. If the businesses cannot pay it back, that is default, however, the investor will still be reimbursed with the original payment. 

Comparison:

• Stocks are riskier than Bonds, however, they have a higher reward if investment is successful. Bonds guarantee a profit, and stocks do not. For long-term investment, stocks have a high rate of return. On the other hand, Bonds have less risk and volatility in the short-term. 

• The benefits of stocks are dividends and ownership/voting rights of a company. The benefits of bonds are interest and preference from the company or government that issued the bond. 

In conclusion, stocks have both a higher risk and a higher reward, which requires people to have risk tolerance when the stock market fluctuations daily!

For additional practice with the stock market and experimentation, the Investopedia Stock Simulator is a free stock simulator that allows you to experiment with new investment strategies, try out different companies, prepare for the stock market, and start with $100,000 in simulated cash.