Debt vs Ownership

When we talk about debt, we usually understand it as a loan to someone like a car loan. But what else can it mean? How can you utilize it as an investment for yourself? What is ownership and how does it play a role in things like the stock market? We touch on these and discuss the different angles of how it affects investing and why it matters to you.

Let’s be honest though. It’s mostly just Chris being confused.

Also there are bad dad jokes. But they don't have to be good to be a dad joke right?

Transcript

Sean Cooper: 0:00

Ready should we actually get on this? Maybe start talking some investing?

Chris Holling: 0:05

No, because I haven't told you I went to a fancy dress party dressed as an alarm clock but I left early in a bad mood. People are there winding me up all night. Okay, let's say I the the pessimist sees the tunnel, the optimist a light at the end of the tunnel. The realist sees a train. The train engineer sees three idiots on the railroad tracks. Okay, I like that. That's, that's good. That's That's good. Okay, Sean. Should we start stuff?

Sean Cooper: 0:50

Indeed.

Chris Holling: 0:51

Okay, Indeed, indeed. 1

Sean Cooper: 0:55

2

Chris Holling: 0:56

3

Sean Cooper: 0:57

4

Chris Holling: 1:00

5. Welcome, everyone, again to another episode of truth about investing back to basics. My name is Chris Holling.

Sean Cooper: 1:35

And I'm Sean Cooper,

Chris Holling: 1:36

and we want to talk about debt versus ownership. Today,

Sean Cooper: 1:42

stocks versus bonds.

Chris Holling: 1:43

What No, I even told you

Sean Cooper: 1:45

debt versus equity borrowing versus selling. Lending versus buying.

Chris Holling: 1:51

So you're it's not it's not that

Sean Cooper: 1:54

it's all the same stuff

Chris Holling: 1:55

I read you the wrong thing on our episode plan list and you're going rogue on me it's it's that you're describing what we're going to talk about and and

Sean Cooper: 2:03

that's right.

Chris Holling: 2:03

I had No idea. Well, good.

Sean Cooper: 2:10

I wasn't disagreeing with you.

Chris Holling: 2:11

I you know, it sure felt like it. I could feel the animosity through your response, which is Oh, as

Sean Cooper: 2:18

Feeling a little defensive over there,

Chris Holling: 2:19

as I'm told. As my wife likes to tell me tone matters. You said it was such a tone that I just I felt I felt immediately defensive and I okay, well, here's the deal I my my preparation for today was me looking at the thing that says debt versus ownership

Sean Cooper: 2:48

Good job.

Chris Holling: 2:50

Thank you

Sean Cooper: 2:50

Way to be a go getter.

Chris Holling: 2:53

Did you like the emphasis on the on the sipping? I thought that was it's much more of a visual

Sean Cooper: 2:59

it didn't quite come through for me,

Chris Holling: 3:01

sir. Oh, yeah, that was uncomfortable. I'm sorry. Okay, well, yeah, let's Okay, let's let's, what why what what is, okay, we'll do what we've been doing this season, I think I'm going to say what I understand debt versus ownership to be. And then you either tell me, I'm an idiot, or you go You're right, but you forgot these things. And then we'll we'll go from there.

Sean Cooper: 3:25

Okay, perfect,

Chris Holling: 3:26

cool. So, ownership

Sean Cooper: 3:28

Fun for everybody

Chris Holling: 3:30

ownership is the actual owning of said item of some sort, which is usually involving in my head say a car will go with a car today the owning outright of the vehicle and there is not a lien on that vehicle at all, because it is yours through and through because it is bought and paid for entirely and you do not owe anybody any money anywhere. Whereas if you have a lien and an agreement where it is a partial ownership to you and the person that you have the loan agreement with, then you are in that person's debt and well person but you know that that entities debt and therefore share ownership at that point, and alluding to your mentioned earlier than you might be sharing ownership within stocks. That makes sense since I'm saying it out loud. And and you also need to own the way that you act in a day to day manner. So that society doesn't look down upon you.

Sean Cooper: 4:52

They often do that anyway.

Chris Holling: 4:55

Stop talking about me. There's there's There's my, my Crash Course, was that I cover everything. Are we going to have one single episode where I go? This is what I think it is. And you Yeah, man, let's wrap it up. As I'm thinking No, but

Sean Cooper: 5:15

today is not that day

Chris Holling: 5:16

Tomorrow is not Looking good either. Yeah. But yeah, that's that's what I understand it to be Sean.

Sean Cooper: 5:26

So, so I nothing you said is wrong

Chris Holling: 5:30

I know much, much like how a day to day is for me anyway. Yeah,

Sean Cooper: 5:36

yeah. Can we get Katie on here to discuss that

Chris Holling: 5:39

I don't want to talk about that Nope, No

Sean Cooper: 5:44

No, it's a lot like last time I mean just looking at it through different lenses or from, you know discussing it from a different goal, if you will. So in talking about debt Yes, you're you're talking about debt that the consumer typically sees, you know, all of us see on a day to day basis debt in the form of borrowing to purchase something, you know, a car or a house or even using a credit card to buy your your day to day groceries taking out temporary debt in that that form. From an investor standpoint, the debt is reversed, if you will. So when a company is looking to get started looking to grow, or expand something along those lines, and they need additional funds more than they can raise on their own, or more than they can borrow from a bank. More than they can generate by selling their product or service, they have a couple of different options. Number one, they can borrow from investors. So they actually become the borrower and you you the investor becomes the lender. So that is what that is basically what a bond is, a bond is their promise to repay you plus interest, repay you being the investor. So it's debt reversed, if you will, instead of you being the borrower, you are the lender, you're the one getting paid the interest. And like you were talking about, the other option is for them to actually sell part of the company. So they're actually selling ownership in the company. And that's what you are buying. When you buy a stock, you are buying ownership, a very, very small percentage of ownership typically, unless we're talking, you know, venture capital, and you're actually, you know, buying 30 40% of the company, something like that.

Chris Holling: 7:42

Shout out to previous episodes,

Sean Cooper: 7:45

Thats right

Chris Holling: 7:45

venture capital.

Sean Cooper: 7:46

That's right,

Chris Holling: 7:46

That's right.

Sean Cooper: 7:48

So but most of the time, we're talking about individual share purchases, in which case, we're talking about tiny, tiny pieces of the the overall company, unless you're buying lots and lots of shares.

Chris Holling: 8:01

And then, like, when you're setting up a bond, and not so much a purchase into the ownership venture capitalism side as a whole, that I would assume is a How do I put this, like a, like, agreed upon thing ahead of time, I guess is the best way to put it. So like the the option comes up as a, we are selling bonds into this company, and then you purchase it and then your money's returned down the road, because you're the lender? Or does that kind of happen? No, I guess that's the only way that makes sense. Because then if you're involving an actual ownership of the company, then it's just the option to purchase that owner back out down the road, but it's not a guarantee that that person getting paid back per se. Right.

Sean Cooper: 8:53

Right. So you're getting a number of different things. So first off, in regards to the bond, yes, it is stated upfront, it is stated in the form of a coupon that would be your your interest rate. So bonds are sold at a how, how did I lose the name of it? par value is normally like 1000 bucks for a bond.

Chris Holling: 9:18

Okay

Sean Cooper: 9:19

Okay, so that that's the value of the bond, that's what you're going to get paid back at the end of the term what, you know, five years, 10 years, whatever the term is for the bond, you're going to get$1,000 back, they have a set coupon rate that they're paying. So say it's 5%. So on that$1,000 bond, you're going to get paid $50 annually. Okay. What you pay for that bond varies depending on where interest rates are. So for example, if interest rates currently are 3%, and they're paying 5%, then you're going to pay more than$1,000 for that bond in order to buy it

Chris Holling: 10:05

at the initial purchase,

Sean Cooper: 10:08

correct,

Chris Holling: 10:08

okay.

Sean Cooper: 10:10

So you're gonna pay, basically whatever excess amount brings that 5% coupon down to an annualized yield of roughly 3%. Whereas if it's a coupon of 3%, they're paying 3%. And interest rates are currently 5%, you're going to pay less for that bond. So you're going to buy it at a discount, rather than a premium. And that's so that you annualize closer to that 5%. Because if you buy it for, say, $950, then you're getting that 3% coupon plus you're realizing a gain at the end of the $50 difference between the 950 you purchase it for and the $100. par value,

Chris Holling: 10:54

I believe it's pronounced coupon. Okay, so I, unfortunately, and I, I'm sure this is my problem, and everybody else listening is like, this guy is slow. But I was, I was I think that was too many numbers for me to retain, to be completely honest. So when

Sean Cooper: 11:12

the numbers aren't really that critical in this regard, because they weren't exact.

Chris Holling: 11:16

Okay,

Sean Cooper: 11:16

the point is, it is laid out upfront, if the coupon that's being quoted is

Chris Holling: 11:23

coupon

Sean Cooper: 11:23

higher, yeah, sure. Higher than current interest rates, you're going to pay a premium for that bond. If the coupon being quoted is lower than current interest rates, you're going to buy it at a discount,

Chris Holling: 11:35

okay. But when from when you're looking at the the interest rates is that higher interest rates than the normal or where it was when the company was founded? Or what what's the baseline for this interest rate?

Sean Cooper: 11:49

baseline for the interest rate is whatever current current going rates are, relative to the credit quality of the company. So if other companies, so if in general terms, we're talking about a high credit company, so a company that's very likely to stay in business, very likely to pay their their coupon and be able to purchase, pay their bonds back in the end, if the going rate is X percent, that's kind of your baseline, and then what they decide to pay as a company for their coupon is the relative where it be that relativity comes into play.

Chris Holling: 12:34

Okay, and

Sean Cooper: 12:35

so it's just the market rate, whatever the market rate is, at that time when the bond is issued, or when you're purchasing the bond, because even though the Bond could be, let's say, the going rate is 5%. And they issue a bond at 5%. Okay, so that bond is going to be purchased at par.

Chris Holling: 12:56

So just for easy,

Sean Cooper: 12:57

but interest rates are going to go ahead,

Chris Holling: 12:59

I'm sorry, just for easy numbers on this. So like, we'll do $100, right for whatever the base is on this just so that like 5% is five bucks kind of thing. So your your bond is that $100 and your your 5%, that you're looking at your 5% interest rate exists, and I get that. So what where does that come into play?

Sean Cooper: 13:23

The current 5% or the 5% of the company's paying?

Chris Holling: 13:26

I guess that's what I don't understand. That's my fault.

Sean Cooper: 13:30

No, that's okay. So the current 5% is really derived from market participants market demand, supply and demand and the appetite for risk. So for example, if there's lots of things that are going to come into play here, number one would be what we talked about previously looking at prime or labor, which is the London interbank offer rate. So those those baseline rates that are really kind of derived from governments,

Chris Holling: 14:00

okay?

Sean Cooper: 14:01

So the Federal Reserve, so that's going to typically be a factor. Other factors are going to be the risk, not only in the market at the time. So if there's lots of volatility in the market, that's going to create more of a risk premium people are going to demand a higher interest rate than they might otherwise would. And then the risk of the individual company, so you know, you look at companies, their their credit rating, there's number of different companies that actually do credit ratings on corporations. And so triple B would typically be like the cutoff between your high yield and your more standard more higher credit quality companies. So anything in the a range is going to be a higher credit rating and therefore going to, they're not going to have to pay as high interest rate to get people to invest in them because they're less likely to go bankrupt and not be able to pay their debt back. So it's the risk of the company the risk that the company will not be able to pay back. That is part of where that interest rate that the demand side interest rate is derived from.

Chris Holling: 15:23

Okay. I think that makes sense. Just the there's there's different companies that that get involved, or, depending on the company that you're looking at may affect different portions of it, depending on what level they're at, you know, their their volatility and stuff that you're you're talking about. And I guess I'm referring to that first stage, the the initial part of like, I get that different variables create the different interest rates now, I'm, I'm getting that. And I guess I'm talking about now that we're talking about the investing process. This season, I I decided that I want to start looking at purchasing bonds, and you own a company that is going to sell bonds, and let's do business, you and I right? And so since we've established the market rate is that 5% amount because of these variables that we were just talking about.

Sean Cooper: 16:20

Okay,

Chris Holling: 16:21

I say I want to buy this bond from you, that is valued at $100. And I know the 5% market rate exists. Does that cost me $105? To purchase?

Sean Cooper: 16:34

No.

Chris Holling: 16:34

Okay, how much?

Sean Cooper: 16:36

Well, I mean, it depends on what the coupon is that the bond is going to be paying.

Chris Holling: 16:40

Coupon Okay, sure. I that's what I'm trying to understand. I I'm learning about bonds, I know that there's variables and depends on the company. And because you're reliable, and I've looked at the variables, I know that it's gonna sit at 5% with you, and I say I want to buy a bond worth $100. And there's a 5% rate in there. What do I owe you? And you say, blank,

Sean Cooper: 17:07

I say, what's the coupon that the company is paying?

Chris Holling: 17:11

I don't know. I have no idea.

Sean Cooper: 17:13

Well, that that determines the price.

Chris Holling: 17:14

Okay. So

Sean Cooper: 17:16

without knowing the coop, okay, you got you got to know the going interest rate, you got to know the coupon, then you can determine price.

Chris Holling: 17:23

Okay.

Sean Cooper: 17:24

So what you also have to know the the term of the bond how long it's, it is, but

Chris Holling: 17:32

I don't know, give me an example, then give me give me like a, an example coupon. So that I'm tracking here.

Sean Cooper: 17:41

Well the coupon is an interest rate. If it's a brand new bond, oftentimes, it's going to be issued at the current going rate for that particular company's risk level,

Chris Holling: 17:51

which is the 5%. Right, that we're talking about?

Sean Cooper: 17:53

Correct.

Chris Holling: 17:54

Okay, so we know that it's $100 bond, and it's a 5% coupon interest rate thing that we're looking at. So do I, do I pay you 100? Do I pay you 105? Do I pay you 95? What

Sean Cooper: 18:10

if Okay, so, first off your $100 is killing me because they're all they're always in increments of 1000. But

Chris Holling: 18:18

do what? Okay, let's take that out. see if 1000 1000.

Sean Cooper: 18:25

Thanks.

Chris Holling: 18:25

All right. You're welcome. You're very well.

Sean Cooper: 18:28

So the assuming the going rate for my company's risk rating is 5%.

Chris Holling: 18:37

Yes.

Sean Cooper: 18:38

If I'm paying a coupon that is also 5%. Then you would pay par value. So if it's$1,000 bond, you'd pay $1,000.

Chris Holling: 18:49

Okay, at a 5% interest rate that's established when you buy the bond, then

Sean Cooper: 18:56

correct.

Chris Holling: 18:56

Okay.

Sean Cooper: 18:57

Yes.

Chris Holling: 18:58

And then with the bond established at that 5%, that we were talked the 5% coupon that we have

Sean Cooper: 19:08

right

Chris Holling: 19:09

established here, then when you pay me back as the owner, then I will get my 1000 plus 50 bucks, because that's the 5% that was established.

Sean Cooper: 19:21

Right? And you would have received $50 every single year as well.

Chris Holling: 19:24

Okay. Okay, because it holds that 5% that was established annually. And then when you pay me back, it's the original 1000 and the final 5% or whatever, but the

Sean Cooper: 19:39

exactly,

Chris Holling: 19:40

okay. Okay. Now I'm tracking here. So when does that change to the 950? When does it become like a discount at that point, so to speak.

Sean Cooper: 19:51

Okay, so I'll touch on that here in a sec. I should also mention that there are other types of bonds, some of them that actually retain all of it. Till the very end, some of them that will pay back a piece over time. Typically speaking, though, you're looking at that coupon that we've been talking about, and then the final payment, all in one lump sum. But anyway, just touching on that

Chris Holling: 20:14

akay,

Sean Cooper: 20:15

where you are going to look at typically that change in the price of the bond is the secondary market. So after the initial issue, so in this scenario, you bought the bond from me, the company, in this example, for 1000 bucks. Now, if interest rates were to fall, a couple years into this agreement, so say it's a 10 year bond, you've had it for two years, I've paid you two years of the $50. And interest rates dropped to say 3%.

Chris Holling: 20:49

Okay.

Sean Cooper: 20:51

And you decide to sell the bond to someone else.

Chris Holling: 20:57

Okay,

Sean Cooper: 20:57

okay, I have nothing to do with it that except for the fact that I'm now paying someone else, but that someone else had to buy the bond from you. Now, because interest rate, the current interest rate market is only 3%. And this bond is paying 5%. It's worth more to someone than anything else in the general market.

Chris Holling: 21:19

Okay,

Sean Cooper: 21:20

does that make sense? Because if they were to go out and buy a brand new bond, it would probably be paying them 3%. But this one's paying five. So they would have to pay a premium in order to get that bond from you. Otherwise, you'd be really silly.

Chris Holling: 21:31

Sure. Yeah.

Sean Cooper: 21:33

So that's where they'd be paying over the$1,000. Mark.

Chris Holling: 21:37

Okay.

Sean Cooper: 21:39

Okay. Whereas if interest rates had gone up from that five baseline, so they went up to 7%.

Chris Holling: 21:45

Right,

Sean Cooper: 21:46

then he, that person who's buying the bond from you could have gone to the market and bought a bond that was paying them seven, but they're buying a bond, that's only paying them five from you, which means in order for them to net the same, they're going to pay you less than the $1,000 they're going to buy it at a discount.

Chris Holling: 22:05

Okay. Okay, that makes sense. And then that, is that done? from person to person? Like, could I could I call you later today and buy a bond from you if you have them? Or is that done through a representative of some sort?

Sean Cooper: 22:18

Typically, you're going to be looking at an intermediary for the most part,

Chris Holling: 22:23

like a company representative or like, I'm sorry, a broker or some sort

Sean Cooper: 22:27

a broker dealer. Yeah.

Chris Holling: 22:29

Okay.

Sean Cooper: 22:30

Yeah. Some of the large exchanges? Well, for example, in the stock market, you have the stock exchanges, like the NASDAQ, or the New York Stock Exchange, okay, there's a market for bonds as well. Typically, you have, most companies have their own fixed income department. So where you can you can buy and sell bonds.

Chris Holling: 22:51

Okay. Okay, that makes sense. I'm glad we cleared that up. I was really confused there for a minute.

Sean Cooper: 23:00

Okay, no, I'm glad. But the other aspect of this that we need to touch on before we jump over to the stocks and the ownership is there's a couple of reasons why someone might buy a bond, as opposed to, you know, might lend a company money as opposed to actually giving them money in exchange for ownership.

Chris Holling: 23:22

Okay,

Sean Cooper: 23:22

as we've already talked about, that coupon is a set amount, you know, what you're going to get. So having a fixed payment, hence, fixed income from the borrower or the lender standpoint, can be very nice for planning purposes. On the other aspect of it is, if something were to happen to the company, they were to declare bankruptcy, they were going to cease to exist. Those lenders are going to be one of the first people paid back.

Chris Holling: 23:52

Okay.

Sean Cooper: 23:54

So if a company has bonds outstanding, as well as stock outstanding, and they go bankrupt, the bondholders get paid back before the stockholders.

Chris Holling: 24:05

Okay, that makes sense. Is it is it common practice? Kind of like when we were when we were talking about the GameStop exchange stuff that was that was going on at the time and in in also a previous episode, that when there's expectation that companies are going to possibly go out of business and you you put a put on them, right?

Sean Cooper: 24:33

You would buy a put

Chris Holling: 24:35

Buy a put put, I like put a put, it's kind of like it's kind of like put put, but you, you would buy a put because you you believe it's going to be worth less than than it is at the time. Is it also common for people to simultaneously purchase bonds within those companies while they're thinking about it, or. Im just trying

Sean Cooper: 24:59

not Tipically Well, I mean, it depends on your how high a risk we're talking about if I'm actually going bankrupt. So So I mean, you're you're delving into derivatives with your your put, which is an option

Chris Holling: 25:12

in a future episode. Pineapple juice.

Sean Cooper: 25:14

But yeah, we don't want to get too deep into that

Chris Holling: 25:15

From a bond one, the bond, yes, the bond is going to be more secure than any equity that you might take out in the company might buy in the company. But if we're talking about a company that we're really worried about going bankrupt, there's still the chance that you will not get all of your money back.

Sean Cooper: 25:33

That's why, right, and that's why the bond in order for that company to sell bonds, in that case, they're going to be a high credit risk, they're going to have to pay a much higher interest rate in order to attract investors.

Chris Holling: 25:46

Okay, that makes a lot more sense. That's why I wanted to ask that. Okay.

Sean Cooper: 25:50

Yep. So that's where we get the high yield bonds, higher risk higher. And by higher risk, I mean, higher risk that the company is going to go bankrupt, but also higher yield, and that yield is the the coupon higher interest rate,

Chris Holling: 26:03

okay. Yep, that makes sense. Okay, well, then then talk to me about stocks in ownership, then.

Sean Cooper: 26:10

So that would just be the other side of the coin, where, as opposed to lending money and expecting a set payment, in return, you are actually buying a piece of the company with the expectation of participating in the growth of that company. Or the if not the growth, at least the earnings of that company, because there are two ways that you're, you can recognize appreciation as a stock owner. And neither of them are set in stone, when you buy it the way it was with the bond, like there's no set coupon, when you buy a stock. Now the company, one of the two ways they can pay their owners is in the form of a dividend. So after, and we've talked about this a little bit before, where you have the company's overall revenue, and then they pay it cover all their expenses, their employees or their buildings, all their their costs of goods sold all that stuff. And at the end of the day, they have their gross their profits, their their net profits.

Chris Holling: 27:21

Right

Sean Cooper: 27:22

of those profits, they have a couple of different options. One of them is to pay their owners a dividend. So that dividend for a lot of companies, they treat it almost like a coupon, and they try to keep it very, very steady. To attract investors, they see that you're paying, you know, a 4% dividend every year over time maybe it even grows very slightly over time, something along those lines, but it's not guaranteed. There's no guarantee behind that dividend. Unless we're talking about preferred stock, in which case the it's it's still not guaranteed. But the the set or the the interest of that dividend is set upfront. And it is senior to non preferred stock buy. We're getting kind of into the weeds there with that though. Yeah, exactly. So the dividends are one way that you're looking to recognize appreciation or return on investment when you buy a stock. The other way is the actual appreciation of the company or the growth of the company. So the overall value of the company goes up your share of the company, your your stock price goes up to reflect that.

Chris Holling: 28:42

Sure. Right.

Sean Cooper: 28:44

And that one, you can only technically recognize that appreciation if you actually sell your stock, and then you recognize the gains on it there. But obviously, you it can also depreciate this the value of the company, the value of your stock can go down and then you have a loss. So that that's where one of the many ways that the the bond versus the stock is different.

Chris Holling: 29:09

Yeah, I get that. And that's, that's more recognized in the sense of where you have involvement in the company and aren't receiving any, any profits in dividends that you would see. I mean, I guess both ways, but when you're talking about only getting your money back from selling your portion of the company, that's that's when dividends aren't being paid out at the time, right?

Sean Cooper: 29:34

Yeah, there's lots of companies that don't pay any dividends at all.

Chris Holling: 29:37

Yeah.

Sean Cooper: 29:38

And then you're literally your only value in terms of recognizing appreciation is if the price of the stock, the value of the company goes up over time, and then you can sell it at a higher price than what you bought it for.

Chris Holling: 29:53

Yeah, absolutely. I mean, I'm comfortable with that. I don't even I don't even know that I follow up questions for it.

Sean Cooper: 30:00

No, that's fair.

Chris Holling: 30:01

That makes sense.

Sean Cooper: 30:02

Yeah, I mean that that's kind of the broad terms in term, when we're talking debt versus equity. So the debt would be the bonds, the equity would be the stocks.

Chris Holling: 30:13

And, and I, I'm sorry, I cut you off. Go ahead

Sean Cooper: 30:17

oh, just saying that the bonds would be the investor is a lender, and either with the stocks, the investor is a owner of the company. Now, keep in mind when we talk about ownership, and you mentioned kind of participation, when it comes to stocks, typically, you're not a participant in the way like a an executive of the company is

Chris Holling: 30:41

right,

Sean Cooper: 30:42

you know, with with most stocks, you're not interacting with the day to day operations, there might be some various elections that go out. So you'll you'll have some say in some of the bigger decision making like should we elect a new CEO? And yeah, these are our options that the Board of Directors has presented. They're recommending this person, and do you agree with that election for the CEO? Or is there somebody else that you? And normally it's just a yes or no vote? It's not typically. Here, all your options?

Chris Holling: 31:24

Sure.

Sean Cooper: 31:25

But those are the types of things or, you know, we're changing the way voting is done. And we only need x percentage to make this pass instead of a different percentage, or we want to change the dividend. You know, that depends on a variety of things. And most time a dividend change is probably a poor example, because they're just going to do it based on profitability. But yeah, there are a few things that as a participating stockholder, you would get a say in, but it's not. For the most part, you're not a participant in the company, though, the way the the owner, the primary owners of the company are or the way the board of directors or the CEOs or executives are. And if you're a preferred stockholder, you probably have no voting rights at all.

Chris Holling: 32:26

Gotcha. Unless you unless you own a certain portion, to a large portion to be able to make those decisions, because then you get out of that position, right?

Sean Cooper: 32:37

Not with preferred stock, typically, preferred stock has no voting rights. So it's just a different type of stock. So you're, it's still ownership, but it's kind of that trade off of the most stock that you're going to buy is you get those voting rights, whereas with preferred stock instead, in exchange for forgoing the voting rights, you're getting a preference preferential treatment on the dividends that are paid out, and normally, it's a set dividend, that you get paid as a preferred stockholder before any other stockholders get any dividends.

Chris Holling: 33:13

Gotcha. Okay. Yeah, I guess I was under the impression that if you if you purchase that amount, then you you go into a slot where you'd be able to have those voting rights, but not, not under that category.

Sean Cooper: 33:24

Yeah, it all depends on the type of stock that you're buying.

Chris Holling: 33:28

Okay. Yeah, that makes sense. What, but what else what else we got?

Sean Cooper: 33:35

That was it, I was just trying to help people understand the difference. Why stock typically has a higher return on investment than, than bonds. And it's because it is more risky, you're actually taking ownership, you're not getting any type of set set payment. you're relying on the growth of that company predominantly, and possibly dividends from profit profitability, whereas the bond has a stated coupon rate and has preferential treatment in terms of repayment if something does happen to the company, whereas stockholders are the last to get repaid. So you have a higher likelihood of losing potentially everything. And then just in terms of the you know, what you're trying to achieve? Do you as an investor want a set payment, you want that that that lower risk of being a secured creditor or potentially even an unsecured creditor relative to a stockholder? Or do you want ownership in that company in the chance to participate in the growth of the company? So typically speaking, the stocks act as a better hedge against inflation like what we were talking about in a few episodes previously, then then bonds but they are they are more risky. So Just wanted to get help everybody understand the

Chris Holling: 34:59

yeah, that totally makes sense those differences from an investor standpoint, and also from the standpoint of the company, when they're choosing to raise money, whether they decide to lend or actually sell part of the company is when they sell part of the company, you know, if they own 100%, and they decide, okay, we're going to sell 30% of the company. Well, that's 30% of the company that they no longer get to benefit from the the future growth of the company on that portion of it. Right

Sean Cooper: 35:27

they're. They're giving that up. So right.

Chris Holling: 35:30

No, I think that's important, you know, more more tools for the toolbox, when you're when you're looking at stuff. And if you are concerned about inflation, maybe reevaluating bonds or, or just, you know, being being aware of it, because that's, that's what we're about is making sure that you just know what's going on. And you can you can make the the choices that you think are important to you, that you think is going to be the most beneficial for for you and, and all the reasons that investing is important to you.

Sean Cooper: 35:57

Yep.

Chris Holling: 35:58

I like it.

Sean Cooper: 35:58

Yeah. And, you know, in general terms, you typically see a portfolio have a mix of stocks and bonds, and other investments. I mean, this is just the tip of the iceberg. There's lots of other ways of investing. But these are the the two biggies is debt versus ownership. Stocks versus bonds. Typically, you'd see a mix, but determining the appropriate mix for you. And also, you know, even evaluating individual companies as to whether or not it's better to buy a stock versus a bond in that particular company. And then you can get into other things like the derivatives of those investment vehicles, or even different forms, like we were talking about the preferred stock, or in the form of bonds, there's also convertible bonds, which are is a bond that it's like it

Chris Holling: 36:53

doesn't have a top on it, you take the top off in the summer time, you enjoy the wind in your hair.

Sean Cooper: 37:00

No,

Chris Holling: 37:01

oh,

Sean Cooper: 37:01

no. But it does provide the flexibility like that, you know, in that the convertible can enjoy the the nice sunny days, if you will, but also go up when it rains. And in that case, the the convertible bond benefits from being a bond that's getting paid a coupon, although it's typically a lower coupon rate than your traditional bond. But it can also benefit if the company does really well, because you can actually convert your bond into stock.

Chris Holling: 37:37

Oh interesting, so

Sean Cooper: 37:37

and that's where the convertible comes into play,

Chris Holling: 37:39

it's just that flexibility to kind of hop around

Sean Cooper: 37:41

correct Yeah, yeah. And it's because of that flexibility that it normally pays a lower interest rate. But it gives you basically the opportunity to potentially participate in stock appreciation as well, should you choose to convert it but without the risk of actually directly participating. So if you know the company does really poorly, then the value of the stock goes down. Now the value of your convertible bond is also going to go down but not to the same degree as the stock itself because you still have that coupon

Chris Holling: 38:14

with the numbers floating through your hair and the

Sean Cooper: 38:19

right

Chris Holling: 38:20

wind on your face. And

Sean Cooper: 38:22

yeah, I don't think that's what anybody envisions when they're talking about driving around.

Chris Holling: 38:26

You know, they should though, you know, you know,

Sean Cooper: 38:28

With the convertible,

Chris Holling: 38:29

they picture, I'm buying a convertible and this. Yeah.

Sean Cooper: 38:34

They should be picturing the numbers. That's true.

Chris Holling: 38:40

No, okay. I think I think that's I think that's good. I think that's a good coverage on on these spots. Unless Unless you think we're forgetting something unless I'm sure I would be forgetting something. If If it were up to one of us to remember something.

Sean Cooper: 38:54

No, I think more than anything at this point, I'd just be getting off into the weeds on some of those other investment vehicles.

Chris Holling: 39:01

No,

Sean Cooper: 39:02

we'll be stuck talking more about no even stocks and bonds in detail later on.

Chris Holling: 39:07

So pineapple juice, yeah. I'm keeping my safe word. Good. I'm glad we were able to touch on that. I hope this I hope this was helpful. I hope that this helps cover some baseses so that if you are getting involved into into these, these portions of Hey, I think I'm going to start getting involved in the stock market and maybe talking to a broker about some bonds and see what you want to do and tools for the toolbox. And while you're looking at these things I'm I'm hoping this establishes a little bit more than just Hey, if I put this money into this, this abbreviation of a name that I think it will go up and I'll make money. This This should hopefully have a better foundation for you to go from. Yeah, me? Yeah, Bueller. Okay.

Sean Cooper: 39:58

Good. Well, and just to clarify, I mean, if you're getting involved in the stock market, and you've opened up an account with, typically that's going to be with a broker dealer or you know, yeah, any number of them out there that you can open up an account with, and they're going to have a bond trading desk that you can utilize, typically. So you can do it all in the same place, whether you're buying stocks or bonds, or exchange traded funds or mutual funds that invest in either or both of those vehicles

Chris Holling: 40:28

and talk with them about your options and see what's the most appealing thing for you. I think that's, that's a good way to go about it. Cool. Okay, wish we should hop off this mic before you get in the weeds, and I yell at you for getting in the weeds. So thank you, again for joining us on another episode on the truth about investing. Back to Basics. My name is Chris Holling.

Sean Cooper: 40:51

And I'm Sean Cooper.

Chris Holling: 40:52

And we will catch you in the next episode. Allegedly. Yes, no we will

Sean Cooper: 41:00

what is our next episode?

Chris Holling: 41:01

Our next episode should be I just looked at it and then I forgot. Your stocks versus bonds?

Sean Cooper: 41:10

No, that's what we talked about.

Chris Holling: 41:11

No, we Oh, well, we love to two episodes. And together everybody. Look at how efficient we are. That's so good.

Sean Cooper: 41:19

So what's after that

Chris Holling: 41:20

passive versus passive slash, active investing, the differences between the two and and we're kind of talking about the God, see, you're gonna get me on a tangent I told you to not put me in the weeds here. Okay, thank you for joining us and we'll we'll catch you next time.

Sean Cooper: 41:37

Perfect.

Chris Holling: 41:42

podcast disclaimer, disclaimer. The disclaimer following this disclaimer is the disclaimer that is required for this podcast to be up and running and fully functioning and moving forward. This is going to be the same disclaimer that you will hear in each one of our episodes. We hope you enjoy it just as much as we enjoyed making. All content on this podcast and accompanying transcript is for informational purposes only opinions expressed herein by Sean Cooper are solely those of fit financial consulting, LLC unless otherwise specifically cited. Chris Holling that's me is not affiliated with Fit financial consulting LLC. Nor do the views expressed by Chris Holling me again, represent the views of fit financial consulting, LLC. This podcast is intended to be used in it's entirety. Any other use beyond the author's intent distribution or copying of the contents of this podcast is strictly prohibited. Nothing in this podcast is intended as legal accounting or tax advice, and is for informational purposes only. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel. Prior to implementation. This podcast may reference links to websites for the convenience of our users. Our firm has no control over the accuracy or content of these other websites. advisory services are offered through fit financial consulting, LLC, an investment advisor firm registered in the state of Washington and Colorado. The presence of this podcast on the internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow up or individualized responses to consumers in a particular state by our firm and the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant to an applicable state exemption for information concerning the status or disciplinary history of a broker, dealer, investment advisor or other representatives. A consumer should contact their state securities administrator. Amen. How do you spell candy with two letters? C and Y? AN D spells Okay. Um, let me think, what was the you know, somebody told me once that dad jokes don't have to be good, they just have to exist

Sean Cooper: 44:37

I think that's what makes them dad jokes.

Chris Holling: 44:39

That's probably tre Actually. singing in the shower is all fun and games until you get shampoo in your mouth. Then it's a soap opera.

Sean Cooper: 44:50

Okay, that one was pretty decent.