Capital Gains

All businesses need an initial investment, which is typically made by few who get the company started. Inadequacy of funds are dealt with by pursuing capital investors or banks to invest in a business by the following two methods:

1. Issuing Bonds
2. Issuing Stocks

Bonds are “fixed-interest” investments. Companies issue bonds to sell debt or draw a loan against money you lend for a set period in return for a fixed income. When the bonds mature, you can retrieve your original investment.

Bonds that are issued by the Government are rated higher than company bonds and are known as ‘sovereign’ debt. In UK, it is called “Gilts”.

Companies issue different types of bonds depending on their credit rating:

1. Debenture stocks - that are secured against company assets
2. Convertible bonds - that entitle holders to convert bonds into shares.

Bonds do not produce high capital returns but provide greater protection against economic downturns and investor security is higher than that of shareholders.

A Stock is a document issued by a company, which entitles its holder to vote and participate in corporate decisions (Common Stock or Voting Share) or the right to legally claim a certain portion of dividend payments before it is issued to other shareholders (Preferred Stock). A Stock option is a “Call” contract to buy or “Put” contract to sell shares of stock at a predetermined price.

Shares can earn you a portion of the company’s dividends and selling those shares can get you capital gains. You can also make capital loss if shares are sold below its purchase price.

Shares can be bought at the stock exchange and transactions are carried out through licensed ‘brokers’.