A stock is an ownership share in a company. Companies issue stocks to raise money. The primary offering of the stocks is called the primary market and occurs during the initial public offering (IPO). Subsequent sales of those stocks are referred to as the secondary market. A share gives the stockholder a vote in the election of the company's board of directors. Some shareholders receive payments - dividends - periodically when the company realizes a profit. Growth companies use their money to pay for new factories, new employees, and new technologies, rather than pay cash dividents to investors. Growth stocks are expected to have above-average increases in earnings and consequently increase in price.

Preferred stockholders receive cash dividents before common stockholders receive theirs and usually receive a higher cash dividend than do common stockholders. Preferred stock is usually higher in price. If a company is forced to liquidate, preferred shareholders will sometimes receive their investment back before the common shareholders receive theirs. In return for the advantages of preferred stocks, their owners, however, only receive a fixed dividend, while common stockholders receive dividends relative to profits.

Companies sometimes split their stocks to reduce the price so more people will buy the stocks. If you had 10 shares worth $20 each, when the stock is split 2 to 1, you have 20 shares each worth $10.

One of the most widely used indicators of the stock market's movement is the Dow Jones Industrial Average (DJIA), the figure you hear about on your evening TV news. The Dow Jones building is pictured to the right. The DJIA is expressed in points, not dollars, and is determined by adding up the prices of all thirty Dow stocks on any business day and then dividing by a special divisor which is changed when one of the companies splits or increases its stock. The divisors for each of the averages can be found in the fine print below the Dow charts in the Wall Street Journal.

Bonds

A bond is a type of investment where you lend money to a company or the Government. In return, you receive a fixed rate of interest each year and the company aims to pay back the capital at the end of a stated period. However, the value of the bonds usually depends on the stock market, meaning there is a risk you may not get back as much capital or interest as you hoped. There are two main types of bonds – corporate and government.

Corporate bonds are bought and sold on the stock market. Whilst the amount of interest that companies pay on bonds is fixed, this is usually at an amount – say $8 per year – rather than a percentage – say, 8 per cent. This interest is known as the coupon. But the nominal value of the bond – usually $100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount at maturity. If the value of the bond increases, for example to $150, the amount of interest you receive – $8 – will seem like a poor return and when the bond matures, you will receive only $100 back, not $150. If the bond decreases in value, say to $50, $8 will seem like a good return and you will double your money when the bond matures.

Government bonds are also known as gilts. Instead of lending money to a company, you are lending to the Government. This is generally seen as a safer investment option as the Government seems to some people less unlikely to be unable to pay your money back. However, they generally offer lower rates of interest than corporate bonds. Gilts pay a fixed rate of interest twice a year – so for example, an investor who holds $1,000 nominal of a 4 per cent Treasury Gilt 2016 will receive two coupon payments of $20 each on 7 March and 7 September. The $1,000 will be repaid on 7 September 2016. Gilts can be bought and sold through the government's Debt Management Office (DMO), which produces a guide to buying gilts.