Let us talk about what you would actually invest in as a client of Elphinstone. Through an Elphinstone account, you can invest in stocks and bonds. Let us first start with some definitions.
A stock, also known as a share or equity, represents ownership in a publicly traded company. When you buy a stock, you are purchasing a small piece of ownership in that company.
Stocks are typically bought and sold on stock exchanges, such as the New York Stock Exchange (NYSE), the NASDAQ, or the Karachi Stock Exchange (KSE) through brokers or online trading platforms.
Stocks provide investors with the opportunity to participate in the company’s growth and profitability. As the company’s value and earnings increase, the value of the stock may also increase, allowing investors to potentially profit from capital appreciation. In addition, some stocks also pay dividends, which are a portion of the company’s profits distributed to shareholders on a regular basis.
The value of a stock can fluctuate based on various factors such as the company’s financial performance, industry trends, economic conditions, and investor sentiment. Stocks can be subject to market volatility, and there is no guarantee of returns.
A bond is a fixed-income investment instrument that represents a loan made by an investor to a borrower, typically a government or a corporation. When an investor purchases a bond, they are essentially lending money to the issuer for a fixed period of time, during which the issuer promises to pay periodic interest payments, known as coupon payments, and to repay the principal amount (the initial investment) at maturity.
Bonds are considered debt securities because the issuer is obligated to repay the borrowed money to the bondholders. The terms of a bond typically include the principal amount, the coupon rate (the interest rate), the maturity date (when the bond will be repaid), and the frequency of interest payments (which can be annually, semi-annually, quarterly, or monthly).
Bonds provide a fixed income stream to investors through the periodic interest payments, which are usually paid at a predetermined rate based on the face value of the bond. This fixed income feature makes bonds relatively less risky compared to stocks. However, the value of a bond in the secondary market can fluctuate based on changes in interest rates, credit ratings, and the overall economic conditions.
In exchange for that relatively higher risk of stocks, investors are typically rewarded with higher returns. US stocks, for example, have had average annual returns close to 8% per year since 1947, as measured by the S&P 500 index (assuming dividend reinvestment). During that same period, US government bonds have yielded an average annual return of 5% per year.
