Introduction
When investing in a market, you'll want to understand the role of following:
- Financial Institutions
- Financial Products
- Financial Advisors
- Financial Statements
- Regulatory bodies
- Taxation and Tax implications
- Protection
- Risk
- Impact of global politics
- Impact of investor sentiment
- Impact of global and local economy
- Earning RSUs and Stock options, Investing in ESPP
Stock vs Bonds
Inverse Performance
An important difference between stocks and bonds is that they tend to have an inverse relationship in terms of price — when stock prices rise, bonds prices fall, and vice versa.
Bond performance is also closely tied to interest rates. For example, if you buy a bond with a 2% yield, it could become more valuable if interest rates drop, because newly issued bonds would have a lower yield than yours. On the other hand, higher interest rates could mean newly issued bonds have a higher yield than yours, lowering demand for your bond, and in turn, its value.
To stimulate spending, the Federal Reserve typically cuts interest rates during economic downturns — periods that are usually worse for many stocks. But the lower interest rates will send the value of existing bonds higher, reinforcing the inverse price dynamic.
2022 wasn't your typical year. The Fed has been raising interest rates in an effort to tamp down rising inflation. And so far, both stocks and bonds are down more than 10%.
Taxes
Since stocks and bonds generate cash differently, they are taxed differently. Bond payments are usually subject to income tax, while profits from selling stocks are subject to capital gains tax (which is lower for some brackets).
However, there are a couple of bond taxation loopholes investors should be aware of.
Municipal bond payments are exempt from federal income tax. Most states also exempt their own municipal bonds (but not out-of-state municipal bonds) from state income taxes.
Treasury bond payments are generally exempt from state income tax, although they are fully subject to federal income tax.