Stocks? Blue Chip? Bonds? Here Are The Origins of Financial Terms in 5 minutes
This article was written by Aik Kai, an avid contributor in the Seedly Personal Finance Community Group
Investing has become a buzzword among working adults as more and more people start to find ways to grow their wealth or seek out passive income.
New and experienced investors alike will come across many terms as they progress on their investing journey. This comes as no surprise as investing, specifically trading of stocks and securities, started since the 17th century.
But have you ever wondered why are blue chips stocks called blue chips? And why is the payout of a bond called coupons? Let us now dive into the long history of investing and see the origins of some commonly seen financial terms.
1) Stocks versus Shares
In the past, when companies issue shares, they will issue ‘Stock Certificate’, a physical piece of paper that represents ownership in a company. The certificate details the date, number of shares owned, a company seal and signatures. Hence ‘Shares’ refers to the ownership of a particular company (eg: I own 1000 shares of SIA) while ‘Stock’ is a generic term used to describe the ownership certificates of any company (eg: my stocks consists of SIA, Singtel, and OCBC). In modern times, both words are used so interchangeably that the line of distinction is blurred.
2) Blue Chip Stocks
We heard about ‘Blue Chip Stocks’ every so often in the news but who are the ‘Blue Chip Stocks? They are typically large, established corporations with sound financial status and are able to withstand changes in the market in good and bad times. As such, owning stocks of these companies is akin to holding on to blue chips, the highest denominator of chips in poker. Examples of ‘Blue Chip Stock’ in Singapore are SIA, DBS and CapitaLand.
Bonds are essentially debts issued by companies to investors. The company who issues the bond is the debtor, while the person who holds the bond is the creditor. Once the bond matures, the principal capital is returned to the creditor. The name, ‘Bond’ is the evolution of the word, ‘Bind’, which as the word suggests, an instrument that ties the debtor to the creditor.
Coupon is the interest rate payable to holders of bonds by the issuer. As mentioned earlier, bond is a debt and you would expect some form of extra payment as compensation for the money that could be deployed elsewhere, hence the interest. In the past, a bond is printed on a physical piece of paper to create a certificate along with small strips of paper that you can tear out. These strips of paper are called coupons. Physically owning the certificate means you physically own the bond. The coupons attached to the certificate tell you how much interest you can earn. To get the interest, you just tear out the coupon and pass it to the issuer to redeem the interest when it is due.
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