“Maconomics” is a weekly series on REVOLT TV, where Wall Street’s premier rapper Ro$$ Mac shares tips about making your money work for you for a change. Catch the insightful advice on it and start watching your pockets grow.
Ro$$ Mac is back with another episode of “Maconomics” and this time, he’s giving us the breakdown on stocks and bonds.
Stocks and bonds are two ways the wealthy pad their bank accounts with more money. They are similar in that they both need to be purchased and they both have the capability to grow your pockets. So, it’s pretty easy to see how anyone can get the two terms confused.
Mac Ro$$ shared his knowledge about their differences, and explained how stock and bonds really work in his latest “Maconomics” episode. Check out four takeaways from his lesson below.
1. What’s a bond?
As Mac points out, a bond is an investment tool and is not to the same type of bond a judge will issue in a court case.
“A bond is having the opportunity to lend a borrower some money,” he plainly puts it.
By definition, it’s a fixed income instrument that represents a loan made by an investor to a borrower. These are typically made in the form of corporate or treasury bonds, however, another type of bond often used is a municipal bond.
A corporate bond is for big time business, such as Apple, who can use the money to make the next iPhone. If the US government needs money for a huge project, then a treasury bond would be issued. Towns and cities looking to build up their communities with a park or airport would be issued a municipal bond.
Basically, buying bonds turn you into a lender instead of a borrower.
2. How bonds works
When you walk into the bank and ask for a bond, they’re going to determine how much they are going to give you, as well as the interest rate based on your FICO score. For big businesses though, those companies will go into a Wall Street investment bank and get a loan based a credit score set by Moody’s, Fitch and S&P.
“Now, they’re going to issue bonds at a face value of $1,000. As the person lending them the money, you’re going to buy one bond at $1,000,” Mac explains of the process. “Based on their credit rating that’s going to determine the interest rate they have to pay you back — that is the coupon rate. Now, over the course of how long they have to pay you back, that’s going to be the maturity.”
For instance, if the coupon rate, or the interest rate the company has to pay you back at is five percent, then the $1,000 you put down for one bond to help build a park in your community will return after a certain amount of time like ten years.
Without doing much of anything, bonds can help increase your wealth.
3. What’s a stock?
According to Mac, “When you buy a stock, you are now owning a piece of this company and you own a share of this company. If this company does well, then value of your shares increases. If this company does bad, the value of your shares decreases.”
In the case of a company doing really well, they’ll then spread the wealth to the shareholders, or people who own stock in the company, in the form of a dividend.
Unlike bonds, the price of stocks are dependent on the market and the risk is higher because there is a greater chance to lose the money that was invested if the company happens to be doing poorly.
4. How stocks work
Stocks are purchased on the stock exchange through a broker, normally from a site like AmeriTrade.
Once you purchase a few stocks, you now own shares in the company. How much ownership you have is based on how many shares you have. Shares ownership offers you the right to vote in shareholder meetings, the opportunity to sell the stock if it’s worth more than what it was originally purchased for, and the possibility to receive dividends.
A dividend is typically paid out if the company made huge profits. Normally, it’s paid out every quarter, however, the company doesn’t have to pay out dividends.
“A stock, the company may or may not pay them back depending on if the company does well or not,” Mac says.
When searching for what stocks to buy, it’s best to do research on what companies pay out and which ones do not.