Question

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What are stocks and bonds? Describe how you could estimate their values. If you are investing in the stock market, which would you invest in and why?

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Answer 1

Stocks and bonds refer to the two major options of an entity to raise capital or funds for the business organization for growth or expansion of business operations.

Stocks refer to the shares issued and distributed among people for raising capital by selling the amount of Ownership or Share of the company in exchange for money. The company has to pay regular dividend for the amount raised from stocks as soon return to investors. In comparison to this , bond on the other hand is a way of raising capital by borrowing money from people through issuing a written statement and promise which ensures repayment on maturity date and regular payment of interest.

Therefore stocks are the shares of individual company for additional financing and bonds are debt instruments for borrowing money for stipulated period to meet the financial needs of business.

For estimating the value of stocks and bonds there are various methods and techniques. The intrinsic value of share is estimated through finding the EPS (Earning per share ). Rule of thumb method is the another method of estimating the share value. For bonds the value is estimated through calculating the PV value of bond's coupon payments.

I would invest in the stock which will promise me the maximum returns and timely payment. The stock which shows a rising trend in the stock market in terms of value and also provides security on regular payment of interest rate will prove profitable to the business. Moreover I will mostly prefer investing in Equity shares rather than the preference shares because investment in equity shares will provide me more ownership in the business organization and will also provide the authority to take viable decisions. Equity shares of a credible company will also be more secure and will provide more control than the preferential shares.

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Thanks dear student.. Hope I explained well.

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