Understanding Stocks and Bonds According to Experts

Understanding Stocks and Bonds According to Experts

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Stocks are securities that show ownership of the company so that shareholders have the right to claim dividends or other distributions made by the company to its shareholders, including claim rights to company assets, with priority after the claim rights of other securities holders are fulfilled in the event of liquidity.

Shares (securities) are pieces of paper that show the rights of investors (the party who owns the paper) to obtain a share of the prospects or wealth of the organization that issues the securities and the various conditions that allow these investors to exercise their rights (Husnan, 2002).

Shares can also be defined as proof of ownership of the assets of the company that issued the shares (Tandelilin, 2001).

It can be concluded that the definition of shares is securities traded in the capital market issued by a company in the form of a Limited Liability Company (PT), where the share states that the owner of the share is also a partial owner of the company.

Types of Stock

Based on the method of transfer, shares can basically be divided into two types, namely:

1. Stocks on the show (bearer stock)

Above this share, the certificate is not written the name of the owner. With the ownership of shares on display, it is very easy for an owner to transfer or transfer them to others because they are similar to money. The owner of this exhibit must be careful in carrying and storing it because if the share is lost, the owner cannot ask for a replacement.

2. Shares in the name (registered stock)

Above the share, the certificate is written the name of the owner. The method of transfer is with a transfer document and then the name of the owner is recorded in the company book which specifically contains a list of names of shareholders. If the shares are lost, the owner can ask for a replacement.

Shares based on the benefits obtained by the owner are divided into two types, namely:

1. Common stock

Ordinary shares are the main source of finance that must exist in a public company and are the most common and dominant securities traded on the Stock Exchange. Bodie et al. (2002:97), explain the definition of common stock as “the ownership of securities rights by the owners of the company’s capital will be announced to the public.” The owner has the right to determine whether to receive dividends or occupy a position in the company.

2. Preferred stock

Preferred stock has the right to take precedence in the distribution of profits and remaining assets in liquidation compared to common stock. The difference with common stock is that preferred stock has a fixed dividend, but like stock, preferred stock does not have a maturity date.

Preferred stock is a stock that has the combined characteristics of bonds and ordinary shares, because it can generate fixed income (such as interest and bonds), but can also bring the desired results to investors (Fakhrudin, 2001).

Advantages of Buying Shares

The expectation or motivation of every investor is to benefit from the investment transactions they do. Playing stocks has the potential for profit in two ways, namely the distribution of dividends and an increase in stock prices (capital gain).

Dividends are company profits that are distributed to all shareholders. Usually done once a year. The form of the dividend itself can be in the form of cash or the form of additional shares. Meanwhile, capital gains are obtained based on the difference between the selling price of the stock and the purchase price. Where the profit is obtained when the selling price of the stock is higher than the purchase price of the stock.

Share Ownership Risk

According to Darmadji and Fakhruddin (2006:13), there are several risks faced by investors with their share ownership, namely not receiving dividends and experiencing capital loss.

1. No dividends

The company will distribute dividends if its operations are profitable. Therefore, the company cannot distribute dividends if it suffers a loss. Thus, the potential is determined by the company’s performance.

2. Capital loss

In stock trading activities, investors do not always get capital gains or profits on the shares they sell. There are times when investors have to sell shares at a selling price lower than the purchase price, sometimes to avoid the potential for greater losses as the stock price continues to decline, an investor is willing to sell their shares at a low price. This term is known as the cut loss.

In addition to the above risks, a shareholder is also still faced with other potential risks, namely:

1. Company goes bankrupt or is liquidated

In accordance with the regulations for listing shares on the Stock Exchange, if a company goes bankrupt or is liquidated, the company’s shares will automatically be removed from the stock exchange or delisted.

In the condition that the company is liquidated, the shareholders will occupy a lower position than creditors or bond shareholders in paying off the company’s obligations. That is, after all the company’s assets are sold, they will first be distributed to creditors or bondholders, and if there is any remaining, it will be distributed to shareholders.

2) Shares are delisted from the stock exchange

Another risk faced by investors is that if the company’s shares are delisted from the stock exchange, generally it is due to poor performance, for example, it has never been traded for a certain period of time, has suffered losses for several years, has not distributed dividends consecutively for several years, and various conditions. other in accordance with the regulations for listing securities on the stock exchange.

3) Shares are suspended (suspension)

In addition to the two risks above, another risk that also “disturbs” investors from carrying out their activities is if a stock is suspended or trading is stopped by the Stock Exchange Authority, which causes investors to be unable to sell their shares until the suspension is lifted. Suspensions usually last for a short period of time, for example, one trading session, two trading sessions, but can also last for several trading days. This is done by the stock exchange authority if a stock experiences an extraordinary price spike, is bankrupt by its creditors, or various other conditions that require the stock exchange authority to temporarily stop trading the stock until the company concerned provides information that is not clear so that it does not become an arena for speculation. If clear information has been obtained, the suspension of the shares can be revoked by the stock exchange and the shares can be traded again as before.

Bond instruments are part of fixed income investment instruments. Bonds are included in the fixed-income investment group because the type of profit income given to bond investors is based on a predetermined interest rate according to certain calculations. The income level can be in the form of a fixed interest rate (fixed rate) and a floating interest rate (variable rate).

In general, bonds are a product of the development of long-term debt securities. The main long-term principle can be reflected in the characteristics or structure inherent in a bond. The issuer of bonds basically makes loans to buyers of the bonds they issue. The income earned by bond investors is in the form of interest rates or coupons. In addition to these rules, an agreement has also been set to protect the interests of the issuer and the interests of the bond investors (Rahardjo, 2003: 8)

Fakhrudin & Hadianto (2001: 15), the definition of a bond is a securities or certificate containing a contract between the lender (in this case the investor) and the one who is given a loan (issuer). So a bond is a piece of paper stating that the owner of the paper provides a loan to the company that issued the bond.

In general, bonds can be interpreted as securities containing a statement of owing a certain amount of money within a certain period of time from the party issuing the bond to the party buying the bond. For this debt, the bond issuer will pay the debt periodically until the end of the bond’s maturity. This bond interest is better known as the coupon interest which is fixed and the amount has been determined in advance.

Bond Type

Types of bonds can be divided into four, namely:

  • A simple type of bond is a bond that offers a fixed interest (coupon) for the term of the bond.
  • Types of bonds that offer floating interest rates (floating rate). Usually offered at a certain percentage above the deposit interest rate.
  • Types of bonds with zero interest rates (zero-coupon bonds). Bonds are sold at a discount at the beginning of the period and then fully repaid at face value at the end of the period.
  • Types of bonds that can be converted into stocks. These bonds are referred to as convertible bonds (Husnan, 1994).

Differences between Bonds and Stocks

Bonds and shares differ in several ways, namely the type of assets, asset risk, business cycle, terms and conditions, and legal aspects. Below is a table that explains in detail the differences between the two.

Thus the understanding of stocks and bonds according to experts and the difference between the two. Hopefully, the readers can understand and distinguish them well.

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