Stocks and Bonds References to the Terms Essay

Stocks and Bonds

References to the terms "stocks" and "bonds" are frequently heard in the mainstream media and throughout the investment literature, but the terms may not be completely understood by the general public. Therefore, making the distinction between the two financial instruments by providing current working definitions and typical examples of stocks and bonds is an important enterprise. To this end, this paper provides a review of the relevant literature to develop respective definitions and examples of the terms "stocks" and "bonds," followed by a summary of the research and significant findings in the conclusion.

In corporation law, the term "stock" is used in a variety of ways. For example, according to Black's Law Dictionary, "It may mean the capital or principal fund of a corporation formed by the contributions of subscribers or the sale of shares; aggregate of a certain number of shares severally owned by the members or stockholders of the corporation or the proportional share of an individual stockholder" (1999, p. 1415). In addition, the term "stock" is used to refer to "incorporeal property which is represented by the holding of a certificate of stock in a wider and more remote sense, the right of a shareholder to participate in the general management of the company and to share proportionately in its net profits or earnings or in the distribution of assets on dissolution" (Black's, 1999, p. 1415).

As discussed further below, the term "stock" is distinguished from bonds because it specifically assigns a right of ownership and a portion of assets of corporations as well as the right to interest in any surplus that remains after the payment of debt (Black's, 1999). In this regard, Black's adds that, "Stock in a corporation is an equity and it represents an ownership interest and it is to be distinguished from obligations such as notes or bonds which are not equities and represent no ownership interest" (1999, p. 1415).In corporation law, other types of stock include holdings of equity items in a company, and the requirements for reporting of the stockholder equity items, capital stock, paid in capital and returned earnings are discussed further below:

Capital stock. There remains a lack of a precise definition for capital and the manner in which it is measured will primarily depend on the intended application. According to Mayes and Young, "There are a number of options both with respect to the values that are attributed to different items of capital (book values, current values, replacement cost, second hand values, constant prices) and to any allowance that might be made for depreciation" (1994, p. 85). Therefore, the reporting requirements for capital stock items will differ according to the type of physical asset that is involved that is used in the capital stock content. For instance, O'Mahoney notes that, "In practice the capital stock is composed of a number of different types of assets which physically deteriorate at different rates" (1999, p. 109). For reporting purposes, O'Mahoney distinguishes between gross and net capital stocks:

1. Gross capital stocks assets are assumed to retain their productive capacity up to the point when they are retired or removed from the productive process; gross capital stocks are generally considered the most appropriate measure of the productive potential of fixed capital unless depreciation accurately measures deterioration in the productive capacity of assets as they age.

2. Net capital stocks allow additionally for depreciation (1999, p. 110).

Paid- in capital. According to Englard (2007), the reporting requirements for paid-in capital vary according to jurisdiction, but some general guidelines are available from the current practices used in several states. In this regard, Englard reports that, "Many states permit stock to be issued without a par value. In these states, the Common Stock or Preferred stock account is simply credited for the full.....