Debt Securities

What Are U.S. Bonds?


When talking debt securities, there’s a few options for the investor. Some of those options are corporate and government debt, and those can further be divided into smaller categories, such as bills, notes, and bonds.

We’re going to be looking exclusively at U.S. government bonds here.

What is a government bond?

A government bond is issued by the specific government, and is backed by the “full faith and credit” of that government. In other words, the government pays you a stated interest rate semiannually, or twice a year, for each bond that you hold.

The bond itself is debt, meaning you are loaning the government money in return for their interest payments to you and, at the end of the maturity term, the government pays you back the face amount stated on the bond.

These U.S. government bonds are called Treasury bonds, because they’re managed by the U.S. Treasury.

Is there risk associated with Government Bonds?

Despite the U.S. government consistently pushing past its debt ceilings and issuing more debt to the U.S. citizens, the government maintains the highest credit rating available (AAA), because the government has a special power– printing an endless supply of money mixed with limitless potential taxing power– when it comes to paying off its debt.

If the U.S. government were to ever default on the interest payments due from the loans, its credit rating would be severely hurt and the faith of the American people in the government’s ability to repay debt in the future would likewise be hurt.

While it is unlikely for the U.S. government to default on its debt, it is always possible, just as has happened to other countries, noticeably during the worldwide recession of 2008, meaning there is still risk associated with any investment.


Disclaimer: This information does not constitute financial advice. For specific information concerning your financial situation, please consult your local financial advisor.

Equity Securities

Common Stock: What Are Preemptive Rights?


When buying a security or option, it is important to look at what features the purchase will entail. Many times what may be included are preemptive rights, which may go by many different names, such as an “anti-dilutive” covenant or privilege.

For many investors– especially larger ones with a greater share of equity in a business– this is a very attractive feature.

Why Do Investors Care How Many Other Investors There Are?

If an investor holds a larger share of equity in a business, they usually hold certain privileges such as greater proportional voting power and they likely do not want to give that up. When more shares are issued, it dilutes their proportional percentage of equity.

Therefore, the power of a preemptive right allows an investor to buy the shares being offered from any new issuance of stock, preserving their proportional share of equity in the business. After the existing shareholders have the chance to buy into the additional shares, then the corporation is allowed to offer the new shares to potential new shareholders.

Are There Any Other Benefits To a Preemptive Right?

Before the new share offering, there is what is called a rights offering. Existing shareholders are given rights– the number of rights being based on their number of existing shares– to buy a certain number of new shares at a discount to the current market price of the security.

If the discount is substantial enough, this can be a great benefit for existing shareholders to increase or maintain their current equity in a corporation while potentially making greater returns on their investment.

This right can be a very powerful tool for a large investor to preserve their ownership and voting power in a business. The preemptive right essentially protects the risk of their share diluting. In a way, it’s like having insurance on your security purchase.


Disclaimer: This information does not constitute financial advice. For specific information concerning your financial situation, please consult your local financial advisor.

Equity Securities

Common Stock: What Are Voting Rights?


One of the most attractive features of common stock for a large investor in a corporation is the right to vote. Votings take place at the company’s annual meeting. The investors in the corporation vote on anything that will affect their “owner’s interest,” including important events like the vote for the new Board of Directors, otherwise known as the company’s top executives that manage the business.

What Other Things Can Owners Vote On?

Obviously, the owners of common stock are not limited to just voting on the executives of a corporation. The right to vote also entails voting on whether the corporation will issue convertible bonds or whether it will declare a stock split, since both of these affect the owners’ interest in the company and will dilute their proportional ownership.

How do the Common Stockholders Vote?

As mentioned, the actual vote takes place at the company’s annual meeting. As for how the votes are counted, there are a few different ways of implementation; however, the most popular ways are cumulative voting or statutory voting.

Cumulative voting generally benefits minority shareholders because it allows them to direct all of their attention to one choice, as opposed to how statutory voting operates, which forces the shareholders to spread their attention to all of the choices being voted on.

Why Do Common Stockholders Get to Vote?

Anyone who owns common stock is a part owner of a company, and just as a small business owner is responsible for deciding how things operate in their own business, shareholders must decide how things will operate in their business as well. And choosing effective managers is one of the most important parts of making sure that a business runs smoothly and profitably. And making sure that more shares being issued do not affect their ownership stake in the business is equally important to investors.


Disclaimer: This information does not constitute financial advice. For specific information concerning your financial situation, please consult your local financial advisor.

Equity Securities

What Is Common Stock?


When talking about securities, the most available (and generally most affordable) equity security is the common stock. When a company goes through incorporation, part of the process requires that the company offer shares of stock to investors so that the owners of the shares in turn become part owners of the company, and therefore have a stake in how the company operates and the profits or losses that it returns.

This is a reason why another name for shareholders or stockholders is also stakeholders.

The stock that the company may offer is divided into two main categories: common and preferred. Here, we will only be discussing common stock and we will save preferred for another time.

So what is special about common stock?

Common stock has many attractive features, including voting rights for certain events in the company, a potential for a high return on investment, and the possibility of a quarterly dividend paid out of a company’s profits.

The voting rights inherent in common stock allow the investor to vote on certain issues in the company, such as voting on the members of the Board of Directors. This feature truly showcases the fact that the owner of the stock really is a proportionate owner of the company, no matter how small their vote may seem compared to the amount of other investors.

Inherent in common stock also is the risk. But with great risk comes the potential for great reward. The potential to lose all of your investment in a common stock is matched by the possibility of unlimited gain in the years to come for that same stock.

Because the price of the stock is influenced by the valuation and performance of the company, the potential for a stock truly is unlimited (in either direction, so remember to use your best judgement and the consultation of a professional before any investment).


Disclaimer: This information does not constitute financial advice. For specific information regarding your financial situation, consult your local financial advisor.