Top 3 questions about investing

These are the top 3 questions I received regarding investing.

Question 1: What is the difference between stock and bond?

Answer: Owning a stock gives you the right of ownership of a company’s share. The stock price will fluctuate according to the financial situation of a company. If the company is doing well, the stock price shall tend to rise in long term and vice versa. Investing in stocks is riskier because the stock price is volatile, however, it is proven to be more rewarding as well.

Bond, on the other hand, is like a loan given to an institution / company. In return, the company will pay agreed interest (coupon) throughout the bond tenure. Bond investment is relatively safe as long as the company is sound and still in business.

Question 2: What are dividends?

Answer: Dividends are the payout of a company to the shareholders when the company is doing well. Dividends are derived from the earning / profits from the companies. Normally, new companies tend not to give dividends. Mostly, new companies will keep the profit to grow the companies further. Matured companies will normally give attractive dividends so that the shareholders will stay invested with the companies.

Question 3: What is diversification? Why diversification is so important in investing?

Diversification means spreading the investments into different assets like stocks, bonds, real estate, precious metal, etc. When investing in stocks, normally one will diversify also into different sectors, industries and countries too. This is because investments involve risk, there is no guarantee win in any investment. Diversification will help to reduce the risk of investments. When one asset is decreasing in value, other asset might be increasing in value.

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