Thursday, March 20, 2008

Wall Street Wipe Out

So if anybody needs a lesson on the difference between stocks and bonds, events of the past few days easily illustrate. While the STOCKholders of government-bond-dealer-gone-south Bear Stearns (the company's owners) have almost been wiped out, the BONDholders (lenders to the company) have taken a mild beating, and--if and when the buyout by J.P.Morgan takes place--will eventually be made whole.

Customers of Bear Stearns are fine, as is always the case with these Wall Street takeovers. Most will never know Bear Stearns was even in the news, unless J.P.Morgan eventually folds BS into its own retail unit. The saddest stories are the long-time Bear Stearns employees who held stock in their company. Many future homes, retirements, and childrens' educations have been wiped out.

Today's lessons: (1) STOCKS equal ownership, or equity, and greater risk vs. reward. BONDS equal lender status, a holder of debt against the company's assets. Less risk, less reward, too. (2) Never put all your eggs in one basket, even if it's your company and they make regular investment very attractive.

STOCKS (you own the company)

BONDS (you loaned the company money)

Okay, this second chart is actually of a preferred stock that trades on the NYSE, not a bond, but it shows the relative stability of debt vs. equity. I couldn't find a bond to chart.

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