Investor Trading

3.    Bonds provide a hedge against deflation and therefore must be a part of any investment plan.
4.    In a depression, when securities paying a good and secure rate of return are much in demand, the price of good-grade bonds tends to rise and will remain high as long as times do not improve.
5.    For older people who are anticipating retirement, bond investment offers a certain and secure return which is relatively free  from worry  (except for possible future inflation).
6.    There are certain tax advantages inherent in the ownership of certain state and municipal bond issues. For some individuals this may be very desirable.
7.    The bondholder is a creditor, while the stockholder is a partner in the business. The latter takes all the risks, while the former has his interest protected by the contract, which guarantees him a stated rate of return, the final return of his invested capital, and a prior claim upon assets in case of financial difficulties.
One further important consideration must be borne in mind. All earnings are taxable in computing the corporation income tax liability during any given year of operations. As we shall see later, the interest requirements of a bonded indebtedness are deducted from earnings as a business expense before such tax liability is computed; the advantages of this arrangement are quite considerable. This and other matters pertaining to bonds will be discussed in a later section.
PREFERRED STOCKS
Preferred stock is for those who wish a certain degree of priority in sharing in the earnings of a corporation at a stipulated rate. Preferred stocks are ownership shares with certain special rights; of these the principal one is that of receiving a specified dividend amount before the common shares receive anything at all. It is for this reason that many investors are attracted to this type of security. While it is true that there are various kinds of preferred stock (see below), there are

very few exceptions to the rule that there will always be provision for a first claim upon earnings and dividends, although such claims always rank after those of bondholders. Many investors consider some preferred issues to be advantageous because of their “first claim” upon earnings and dividends. The articles of incorporation will set forth the number, class, and nature of such preferred stocks and the powers and special rights accruing to such stocks as well. Usually a specified number of preferred shares are authorized, although it is not a requirement that all such shares be issued at one time; it is left to the discretion of the directors to act in this matter as they see fit. Sometimes authorized preferred stocks are issued in series, such as 100,000 series A, followed by 50,000 series B, etc. The par value and rate of return are usually specified in the articles, but they may be amended under certain conditions. Sometimes there is a provision which protects against dilution by requiring that no additional preferred may be issued without the consent of the holders of at least two-thirds of the outstanding shares.