The stock market is classified as a long-term investment and savings vehicle. The stock market is where investors can buy and sell a fraction of companies for a profit. Well-performing companies generate a lot of profit, though they are often affected by economic changes. Investing in stocks and bonds is quite easy as they are sold in a free and open market environment. However, investors should be knowledgeable about stock investment to enable them to make the right investment. The purpose of this term paper is to explore the strategies for managing stocks and bonds.
A stock represents an ownership interest in a company (Bratton & Wichter, 2013). When an investor buys shares, he owns a fraction of a company and the investor attends the shareholders’ meetings. The value of the stock increases or decreases depending on the success of the company’s underlying business. The company will pay the shareholders through dividends.
Delegate your assignment to our experts and they will do the rest.
Investors should consider some factors when buying and managing stocks. The first factor being the industry; the investor should investigate the company’s position in the industry, its financial strength, historical performance of its stocks and other factors that can affect the profitability of the company in future. Investors often use securities broker to facilitate the purchase and sales of stocks and bonds. Securities brokers are professionals, and they know how to analyze the stock markets and make decisions that will bring good results for the investor.
An investor should put a limit to the number of stocks in the portfolio. An investor should enforce the limit, and if he/she needs to add new stock, he/she has to sell the stock he already owns. By putting a threshold, the investor will be able to track the performance of the stock and dispose of the least attractive. The investor should allocate more capital to the best-performing stocks, and if possible selling poorly-performing stocks and reallocate money.
Investors should educate themselves on the importance of the right timing in the stock market. According to Kaiser & Young (2014), the right time to sell stocks is when it is on its way up when it is looking strong to everyone else. Investors are warned against waiting until it is too late. For breakout stock, investors should consider taking profit when it is up by 20 to 25%. The timing also matters when it comes to cutting losses, investors are advised to cut all losses on individual stocks at a maximum of 7 to 8% of the purchase price to avoid further loss.
Alternatively, a bond is a debt instrument used by the government, municipalities or corporations to secure loans from investors. The borrower pays the principal amount with interest as long as the company remains solvent. Unlike stocks, bonds are held until maturity. Investors must analyze the interest rate, credit risks, and tax implications before investing in a bond. Just like stocks management, financial professionals are better equipped to manage bonds. They have tools to manage investments to ensure that the investors achieve their goals. For example, a common mechanism is the application of generic formula such that if an investor wants to retire in ten years, financial professionals would advise the investor to invest 60% in stocks and 40% in bonds.
An effective way of managing the stock and bond portfolio is getting the right mix. Investors are advised not to invest in one vehicle, and they should have the right mix of stocks and bonds to enhance profitability in a fluctuating market. When investors put all their resources into one investment, they put themselves at considerable risk. There are different types of bonds and stock, and investors should combine different bonds to minimize risk. Investors should understand how credit and duration risk operate. Companies default on loans when the economic growth is low, but when the economic growth is rising, the interest rate increases and this affect long-term bonds.
Bonds are generally safe and predictable; thus, investors must do their due diligence before buying bonds. Duran (2015) states that different bonds have different forms of stability with non-callable bonds such as government bonds as highly stable bonds. However, some bonds have embedded options written in the bond’s covenant to enable the investor to cash in under certain market conditions.
In conclusion, managing stocks and bonds requires knowledge of the stock market and continuous learning and monitoring. The experience will help me in future to make the right investment decision. It is not enough to save money and buy stocks, as only those who manage stocks well reap the optimum benefit. The other lesson is that no investment is safe from risks. Bonds are often described as the more reliable option in comparison to stocks, and yet they are exposed to credit and duration risks. This lesson can be applied to almost everything in life, whether in school, in business or at home. Everything good comes with a risk, and one must be careful to manage the risk well before it can take over the good parts. All in all, investing in stocks and bonds is a wise decision that can guarantee good returns when proper management strategies are applied.
References
Bratton, W. W., & Wachter, M. L. (2013). A Theory of Preferred Stock. University of Pennsylvania Law Review , 1815-1906.
Duran, D. C., Gogan, L. M., & Duran, V. (2015). A Possible Approach for Managing Bonds Portfolio. Procedia Economics and Finance , 23 , 47-53.
Kaiser, K., & Young, S. D. (2014). Managing for Value 2.0. Journal of Applied Corporate Finance , 26 (1), 8-19.
