Section 4.5

Fundamentals of Market Investing by Adam J. McKee

Business Risk

With a stock, you are acquiring a piece of ownership in a business.  With a bond, you are loaning money to a business.  Returns from both of these investments require that the company stays in business.  If a company goes bankrupt and its assets are liquidated, common stockholders are the last in line to share in the proceeds.  If there are assets, the company’s bondholders will be paid first, then holders of preferred stock.  If you are a shareholder, you get whatever is leftover after debts are paid, which may well be nothing.

If you are buying an annuity, make sure you consider the financial strength of the insurance company issuing the annuity.  You want to be sure that the business will still be around, and financially sound, during your payout phase.  The business risk that you take on when buying a stock or bond can be of several major types, usually derived from the source of the risk.

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