Episode 20: What are Stocks and Bonds?

GRANT: Hey Mak.

MAK: What’s up G?

GRANT: Do you know what happens when you start early?

MAK: I do G. You go wealthy.

BOTH: It’s time for money with Mak and G. Finance for you and your family.

MAK: Hey Grant, now that we know investing is growing our money, it’s time to dig into stocks and bonds.

GRANT: Yeah, I’m not sure I would have known to buy Ben Kenobi four years ago. But 30k is quite a return.

MAK: Agreed. That’s something from Crazy Town.

GRANT: Alternative investments are one thing, but stocks and bonds are supposed to be easier than knowing which video game box to keep in which to throw away.

MAK: And let’s not forget the investing mantra.

BOTH: Buy low and sell high.

MAK: This is my dad’s sweet spot. He’s always talking about stocks and bonds.

BOTH: Dad!!! We’re ready for stocks and bonds.

DAD: Hey, that’s awesome. Time to talk about stocks and bonds. I feel like a million bucks baby.

MAK: Know how much you love talking about this stuff? And I’m ready to listen and probably ask a couple of questions.

GRANT: Me too. Anything to fill my pockets with a lot of cabbage is good for me.

DAD: Okay, so where do you think you want to start this discussion?

MAK: I got this one G. We start with companies.

DAD: Exactly Mac. Do you think you can name any companies?

GRANT: Absolutely. Grant and Mak’s dog walking service.

MAK: Hey, it’s Mac and G’s dog walking service.

GRANT: You got your name first on the podcast? I should get it first at the company.

DAD: Wow. We’re talking about pure love here. Yes, you do have a company but what other companies are out there.

MAK: We know a company sells a product or service as we discussed.

GRANT: So there are probably millions of companies.

DAD: Do you know that the last time the government counted, there were about 6 million companies in the US. And more than half had less than five employees.

MAK: Just like ours.

DAD: Yep. So can you name some big companies that I may know?

GRANT: I think so. But how do you know if it’s big or not?

DAD: Well, if you see the products or services in a lot of places, that usually means it’s pretty big.

MAK: So when we saw McDonald’s and Spain as well as Florida, Illinois and other places, that would mean it’s probably pretty big.

DAD: Yep.

GRANT: Okay, so how about Chipotle.

MAK: Apple.

GRANT: Amazon.

MAK: Target.

GRANT: Uber.

MAK: Domino’s.

GRANT: Nike.

MAK: Coca Cola.

DAD: Okay, that’s perfect. You just name several. And most of those companies focus on selling a product, right? Do you remember which one is a service company?

MAK: Well, Chipotle is a product company since it sells cases. Domino’s has pizza, Coca Cola has coke and Nike has shoes.

GRANT: Oh, I got it. Uber. It’s like a taxi company. It provides a service of moving people from one place to another.

MAK: You order it on an app on your phone, don’t you? You can watch it on your phone to see when it comes to your house.

GRANT: You can’t touch the actual product like a hamburger or shoes. So it’s a service.

DAD: Exactly G. Way to go. So let’s talk about how these companies get money. Any ideas?

MAK: Well, we started with our own money and borrowed some from you to start a business.

GRANT: Uncle Tony spoke about angel investing last season. And we also spoke about taking out a loan from a bank. Nobody moved. Nobody gets hurt. Is that what you mean?

DAD: Yeah, exactly. So you can get money from a lot of places. As we talk about stocks and bonds. The money comes from those two places, borrowing money and selling part of the company.

MAK: Wait a second, we can sell part of our company.

DAD: Yep, absolutely. However, when we want to talk about stocks and bonds, this means you have to be a lot bigger first.

MAK: Why do we have to be bigger? That doesn’t sound fair?

DAD: Well, the government requires you to do a lot of things in order to sell stocks and bonds. Since there’s so much money involved, they want to make sure that they protect people buying those.

GRANT: So how much does it cost?

DAD: It would cost millions of dollars.

MAK: What? Millions of dollars?

DAD: Yep.

MAK: Why?

DAD: Well, you have to pay lawyers to do a whole bunch of accountants, then someone has to track everything. It’s a lot of work fees, sales costs and many other things.

MAK: That’s crazy. But I guess if it’s billions of dollars, then maybe a couple of million isn’t that much.

GRANT: I guess we have to grow a bit more first.

DAD: Yep, it takes a lot of hard work too.

GRANT: Got it. Stocks and bonds require a lot of money. So the really big companies are the only ones that are able to afford it.

DAD: Yep.

MAK: And if we get really big, we could do stocks and bonds.

DAD: Yep.

GRANT: Well, that definitely sounds like something I want to do someday.

DAD: I agree. So when the companies get this money What do you guys think they use it for?

MAK: They need to pay for offices, employees, machines, inventory and other stuff.

DAD: Excellent. Most of the money is used to grow the company, just like your company. When you start it, you’ve got to make some money, invest in your company, grow it some more than at some point, you’re going to need a lot more money.

MAK: That makes sense. So how does stocks work?

DAD: Well, let’s think about it like pizza. Who doesn’t like pizza, right?

GRANT: I love where this is going. I love Margarita pizzas. Did you know The Marguerite pizza was a gift to the Queen of Italy, named Margarita and represented the three colors of the Italian flag?

DAD: Well, now I do that, it’s super cool. And now I’m getting hungry. But I wanted to talk about stock. If you cut a pizza up, you can buy it by the slice. Each slice is a piece of the whole pizza.

MAK: So if you kind of intend pieces, and you buy one piece, you own 1/10 of the pizza.

DAD: Perfect example Mac.

GRANT: Hey, I can do that, too. If you cut it into 100 pieces and you buy one piece. That’s one in a hundred.

DAD: Absolutely. If you want to own a piece of a company, you buy one piece, and that one piece is called a share of stock. You share in the ownership of the company. But usually there are millions of shares.

MAK: So when we bought a target stock, I owned a small piece target, like a doorknob.

DAD: Well, not a doorknob, exactly. But it does mean you own a small part of the whole company. And if it makes money, then you as the owner make money, just like you earn money as the owner of your dog walking business.

GRANT: Isn’t this where you mentioned dividends? A company that makes money and returns some of it to the owners, usually as money called dividends.

MAK: It’s my favorite thing. ever talk about that? I love to do nothing and collect money.

DAD: I can’t believe you guys nailed it. That’s absolutely true. Dividends are like a healthy apple tree each year, if things go well, you get apples. If a company does well, it can give you money if it decides to.

GRANT: So a company sells pieces of their company to raise money. Anyone who buys it owns part of the company and the company can keep the money.

MAK: And if it makes money, it can give some back to the owners as dividends. So what are bonds?

DAD: Bonds are a little different. If a company doesn’t want to sell ownership and wants to borrow money, it creates a bond, then people can buy the bond.

GRANT: That sounds weird. But a bond is like becoming a bank loaning money to a company. How can I help you?

DAD: That’s exactly what it is. Just like a bank, you collect interest. It’s a little like a stock that pays you a dividend.

MAK: That’s interesting, right? Love that word too. So why would I want to own a bond instead of a stock?

DAD: It’s like when mom and I choose a car. Sometimes we want something faster, or a different color, or more seats or a different style of car. They are both investments, but they offer different things that people may like or don’t like.

MAK: Like what kind of things.

DAD: Stocks are not required to pay dividends, but bonds are required to pay interest. If you want money to come to you regularly, you’ll probably want a bond.

GRANT: Okay, but can’t you make more of being an owner instead of being the bank?

DAD: That’s true. If you own stock and the company gets crazy successful, you win big. If you own a bond like a bank, you only get your interest. So what’s the downside? If you’re an owner and the company goes bankrupt, you get nothing. But as the bank, you get to go into the company and sell some of their stuff like inventory buildings and other stuff and try to get your money back.

MAK: Okay, so it’s ownership with this risk and reward, or it’s the bank with less risk and less reward.

DAD: I could not have said it any better.

GRANT: Dang Mac, you nailed it. Where did you get that insight from?

MAK: I’ve been watching the stock market on TV. They talk a lot about risk and reward.

GRANT: So what are we going to talk about the stock market? Wow, there’s sounds like there’s a lot more and if MaKenna’s watching, it could be interesting.

MAK: I’m game for more.

DAD: Hey, let’s dive into that a bit more on the next podcast.

MAK: Let’s make sure to cover more dividends.

DAD: You got it.

BOTH: Awesome stocks and bonds.

DAD: Before we talk about stocks and bonds, we have to think about companies. A company needs money for many reasons. So basically has two options to raise money, sell part of the company as stock or borrow money and that can be done through selling a bond. When you sell the company you give up ownership, there is a higher level of risk and higher reward. If the company does great, you do great but as a creditor, otherwise known as the banker, you have less risk and less reward. If anything goes wrong with the bank then you have more protection to get your money back. With the stock, you can earn a dividend, but as discussed, the company has no obligation or requirement to pay one. However, the price of your stock can rise or fall. If you don’t need income today in the form of a dividend, that’s okay. But some people do need income. Since bonds require the payment of interest. People who need that income prefer to own bonds. There are definitely stocks that have paid dividends religiously for many years. But I want to highlight the big difference between the two. As we invest we want to buy low and sell high for sure. But we also need to consider the income along the way which are the dividends and interest. Mack loves her dividends, and we’d all love to have huge dividends with no risk. But as an owner, dividends are not a given. And we’ll find out that the more you give back to the owners, the less you can use to grow the company. So it’s a double edged sword. Okay, we can break down this episode into four words, ownership, creditor risk and reward. Stay tuned for a preview of our next episode. And as always, thanks for your amazing support.

GRANT: We finally made it to a point where we’re starting to really know some great stuff about investing.

MAK: Yep, but we need to know more. I want to hear dad talk about stocks. Alternative investments are cool, but…