One-way ticket22
Government bond in your country Safest
2 Low risk
3 Medium risk
4 High risk
‘Hold on,’ she said. ‘I’m not sure of the differences between a
bond and a share.’*
‘The income on a bond is guaranteed. If the company goes bust,
the bond holder is towards the front of the queue of people who
will be paid. An investor’s time exposure to a bond is known
in advance. An investor planning a specic event in their life
– paying a child’s university fees, for example – will have more
control.’
‘At the end of a bond’s life, the borrower has to return the
principal, which is the borrowed money. And bonds tend to have
a very liquid market, so if an investor needs cash their bond can
normally be sold quickly.’
Shares can be low risk, medium risk and high risk
‘When you buy shares, you take the risks that the price may
fall and the dividend may not be paid. Unlike the government
bond, future price movements and dividends from a share are
uncertain.’
‘When you analyse shares you have to be aware of company-
specic risks. These risks are unique to an individual company.’
* The words share, equity and common stock are pretty much interchangeable in
the nancial markets. We will cover the differences between bonds and shares in
more detail in Chapters 5 and 6.
Five ways to create company-specific risk
Create an environmental disaster, and delay your response. The
clean-up after the Gulf of Mexico spill will cost BP at least $20 billion.
fast facts