Investing For Dummies®, 5th Edition

Chapter 4. The Workings of Stock and Bond Markets

In This Chapter

• Going from a private to public company

• Looking at the workings of the stock and bond markets and the economy

• Deciphering interest rates, inflation, and the Federal Reserve

To buy and enjoy a watch, you don't need to understand the details of how it's put together and works. Ditto for investing in stocks and bonds. However, spending some time understanding how and why the financial markets function will make you more comfortable with investing and make you a better investor.

In this chapter, I tell you the ways that companies raise capital and give you a brief primer on financial markets and economics so you can understand and be comfortable with investing in the financial markets.

How Companies Raise Money through the Financial Markets

All businesses start small — whether it's in a garage, a spare bedroom, or a rented office. As companies begin to grow, they often need more money (known as capital in the financial world) to expand and afford their growing needs, such as hiring more employees, buying computer systems, and purchasing manufacturing equipment. Companies can choose between two major money-raising options when they go into the financial markets: issuing stocks or issuing bonds.

Deciding whether to issue stocks or bonds

Note

A world of difference exists between these two major types of securities, both from the perspective of the investor and from that of the issuing company, as the following explanations illustrate: ...