Answer to Question #172323 in Financial Math for Crystal

Question

Your friend told you that she invested $1,000 in a portfolio of large-company stocks 5 years ago and also reinvested the dividends. Her investment grew to $3,456 as at today. Had she invested that same amount in a Government of Grenada bond she would have received $2,500 even if she reinvested the 10 percent coupons paid on the bonds. Given this information, critically discuss why anyone would want to invest in bonds rather than stocks? Further explain why the price of many individual stocks still go down, even when the overall stock market goes up. How can you avoid the value of your stock from going down?

Answer 1

Causes of Fall In Stock Price

1. Selling of stock by major shareholders increases the supply of shares available for sell thereby decreasing the share price
2. Negative review by stock analyst leads to sell pressures due to loss of confidence by the investors
3. Change in future guidelines that are contradictory to to their expectation of the investors
4. Decrease in companies gross margin and its ability not to meet its earning estimate will cause the investors to sell their shares.

Advantages Of Bonds Over Stock

1. Short term Bonds are less volatile than stock thereby are a safer investment than stock.
2. Bonds are often liquid, a sell of large amounts of bonds wont affect the price unlike stock that will decrease due to increase in the number of shares available to sell
3. Incase of bankrupts bonds enjoy legal protection unlike stock which the prices will fall and end up valueless
4. A variety of Bonds( Fixed rate bonds, Floating rate bonds and convertible bonds )help investors meet their unique needs unlike stock which is relatively flexible.

In order to insulate from stock price decrease The stop lower order is used so as to limit investors loss on a security position that makes an unfavorable move.