The distinction between a bondholder and a shareholder
By reflecting on just what that difference is, you can gain illuminating perspective of what type of investment you are making in a company in each case.
When you purchase shares, you become an owner of the company: albeit in the vast majority of cases owning such a tiny fractional percentage that you have no power, but still, that is the relationship in which you stand to a company as a shareholder. And of course you are right down the pecking order if anything happens to the company, but still, that is what you are technically.
Contrast that with bonds of course, where in this instance you are a creditor to the company, because you are lending them money that they are paying you back on maturity with annual interest along the way in most cases.
The difference mentioned above is now pertinent: if the company goes bust, then creditors are much higher up the pecking order than shareholders, so bondholders are much more likely to get paid out than shareholders. Since shareholders are so far down the list, they often do get nothing: if the company had enough money left to pay out everyone down to the shareholders in may instances it probably could have survived!
This additional difference is another factor that contributes to the fact that bonds are generally seen as being lower risk than shares. Therefore those who are investing for the longer term may find these more attractive than more short termist investors.
More investment related articles:
- Investing in Funds
- Dividend yield and the worth of an investment
- Short term and long term growth
- The stop loss and being disciplined with your portfolio
- Reading the directors' deals in their companies shares
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