Please see the statement below and provide your feedback. Thanks!
Large businesses and corporations need large sums of cash to maintain day to day operations. These large businesses could borrow the money from one lender or find another method. The way most organizations do this is by offer stocks and bonds to consumers. Let’s say for instance Company A needs $100,000 for their business. They could take out a business loan from a bank or credit union or issue 100 bonds at $1,000 each to several lenders. Depending on the investor, he/she might prefer one method of investing over the other. Several consumers prefers bonds over stocks because they offer more stability and is considered a conservative investment. Bonds are more predictable while stocks leaves consumers with a level of uncertainty. If Company A ever goes bankrupt, bondholders are normally in front of shareholders when it comes to getting paid.
“In a worst-case scenario, such as bankruptcy, the creditors (debtholders) usually get at least some of their money back, while shareholders often lose their entire investment (Investopedia Staff, n.d.).” Many people question how much money should they have in their bonds portfolio. A general rule of thumb is to subtract your age from 100. That answer will indicate the percentage of your assets you should have invested in stocks and the rest spread out between cash and bonds. I will use a 40 year old woman for my example. 100 – 40 = 60. In this example she should have 60% of her assets invested in stock and 40% spread out between cash and bonds. Classmates, please understand that this is only a rule and some investors will be more aggressive with this formula. I have money invested in stocks but I will definitely diversify my portfolio by adding bonds to the mix.