Motivation and Learning Strategies for College Success : A Self-management Approach

 GI      $

210 CHAPTER 8

Common stock represents ownership of part of a cor-

poration. For example, if a company issues 100,000

shares, then a person who owns 1,000 shares actually

owns 1% of the company and is entitled to 1% of the

company’s dividends, which are the corporation’s annual

payments to stockholders. The shareholder’s vote counts

for 1% of the total votes in an election of corporate offi-

cers or in a referendum on corporate policy.

Bonds differ from stocks in several ways. First, whereas

the purchaser of a corporation’s stock buys a share of its

ownership and receives some control over its affairs, the

purchaser of a bond simply lends money to the firm. Sec-

ond, whereas stockholders have no idea how much they

will receive for their stocks when they sell them, or how

much they will receive in dividends each year while they

own them, bondholders know with a high degree of cer-

tainty how much money they will be paid if they hold their

bonds to maturity. For instance, a bond with a face value

of $1,000, with an $80 coupon that matures in 2004,

will provide to its owner $80 per year every year until

2004 and, in addition, it will repay the $1,000 to the

bondholder in 2004. Unless the company goes bankrupt,

a prior claim on company earnings, which means that

nothing can be paid by the company to its stockholders

until interest payments to the company’s bondholders

have been met. For all these reasons, bonds are consid-

ered less risky to their buyers than stocks.^4

Representation:

(^4) From Baumol, W. J, & Blinder, A. S. (1994). Economics: Principles and Policy (7th ed.).
Orlando, FL: Dryden, pp. 330–331.