Common Stock

• A share of common stock is a fractional share of ownership in a corporation. When companies want to raise capital for investment or expansion, they can either borrow money and pay interest on it, or they can sell stock, or a portion of ownership in the company. Those who own common stock are entitled to a share of any dividends the company issues in the future. Common stock shareholders also are entitled to vote for the company board of directors, which in turn selects the senior management of the company and sets the overall strategic direction and dividend policy of the company.
  
  

Treasuries

• When the United States government borrows money, it issues a treasury security. In return, the government makes interest payments (usually every six months) and pays off the treasury in a lump sum at the end of the term. Very short-term obligations of the U.S. government--those maturing in less than one year--are called treasury bills. Those between between one year and and 20 years in duration are called treasury notes, while those that mature in 20 years or more from issue are properly called bonds.
  
  

Long-Term Bonds

• Because of their comparatively long maturity dates of 20 years or more, treasury bonds are subject to substantial price swings in the years prior to their maturity dates. Bond prices are a function of interest rates. The higher the prevailing interest rate, the lower the market prices of bonds. Conversely, when interest rates are low, bond prices are relatively high. However, the regular payment of interest and eventual repayment of principal are assured.
  
  

Asset Allocation

• Because stocks are incidents of ownership, while treasuries are debt securities, they react very differently to economic events. When the future of the stock market becomes uncertain, or when investors are fearful of potential losses in the stock market, they will often move money to bonds, bidding up treasury prices and causing a rally just as stock prices fall. For this reason, investors frequently combine holdings in common stocks with treasury bonds. Both common stocks and long-term treasury bonds are best suited for investors with substantial risk tolerance.