Investing for beginners: What are stocks and bonds?

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  • With interest rates for savings accounts at historic lows, consider different types of investments
  • All types of financial products carry some risk. Bonds are usually safer than stocks, but have a lower rate of return
Jamie Lam |
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Every type of investment carries some risk.

Not so long ago, banks paid a reasonable amount of interest for the money you put in your savings account. In 2003, the deposit interest rate in Hong Kong was about 2.3 per cent. In other words, if you left HK$10,000 untouched in your savings account for one year, you would earn HK$230.

The current deposit interest rate is 0.001 per cent. This is effectively zero. Coupled with the constant negative effects of inflation (which means a general increase in prices of all goods and services over time), your purchasing power may decrease if you simply leave all your money as cash in your bank account. 

This is why you should consider putting your money into different types of investments, such as stocks or bonds.

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First, though, let’s get one thing straight. There is risk involved when you make any type of investment. Even if you choose very “safe” products, you run the risk of losing your money. There is no magical investment where you potentially gain something with no chance of a bad result. 

If you do not want to take any risk at all, leave your money in your saving account. Cash deposits are guaranteed by the Hong Kong government up to a maximum of  HK$500,000.

Buying stocks

When you buy stocks, you are buying a share in the ownership of a company. So when you buy Apple stock, in a sense you own (a very, very, very small) part of the tech giant.
Stocks are traded on stock exchanges all over the world, and you must buy shares through a broker. 

Most people normally use their own bank as their broker, so you can open an investment account and connect it to your savings account. When you buy stocks, you will have to pay a stamp duty to the government on every trade, and also pay a small fee to the broker .

There are two ways to make money from owning stocks. One is if the value of the stock increases. This may happen if the company reports good financial results, announces an important development, or investors have a positive outlook about the industry. As an example of how this works, if you buy 1,000 shares of HSBC at HK$36, and one month later, you sell it at HK$37.50, you would make a HK$1,500 profit, minus the brokerage and stamp duty fees.

Stocks usually have a higher return than bonds, but they carry a higher risk.The other way to make money from stocks is to hold onto your shares which offer dividends. Dividends are a part of a company’s profit, which it distributes to shareholders on a regular basis (usually one to four times a year). To receive this benefit, you must own the stock on the closing date of the dividend distribution. Companies usually announce the amount and closing date for the dividend well in advance, so you can plan ahead.

When choosing which company’s stock to buy, it’s important to think long term. You can read up about the company and look at their financial reports before making your decision. See if you believe in the long-term prospects of the company before investing your money. 

The price of your stock may change every day, but depending on the overall profitability of the company, you should stick with your investment for the long haul.

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Buying bonds

Bonds are a form of investment where you lend your money, usually to a country or government, or a company, for a fixed amount of time for a fixed rate of interest. 
During the time you hold your bond, you cannot use your money. For this inconvenience, you will be paid an annual interest. When the bond expires (also called the maturity date), you get all your money back, along with the final interest payment.

Bonds are not foolproof but are usually seen as safer investments than stocks because they are issued by countries or large corporations. Their typical return on investment is in the range of 1 per cent to 4 per cent each year.  You can buy them through your bank, for a small fee.

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