Stocks vs Bonds: The Investment Saga

• 8 March 2017 | 1653 Views | By Mint2Save

Both from the perspective of stocks and bonds, an investor wants to go where the growth is….

Those people who are just entering the investment situation will typically find easy to clutch the concepts of stocks and bonds. Both stocks and bonds are two unlike types of assets issued by the corporations to raise funds, to raise money or expand or diversify their operations. Stocks and Bonds are two different investment vehicles purchased by investors.

Investing in stocks in various stock markets is purchasing a piece of the possession or ownership of the corporations who have issued those respective stocks relate. This will qualify you to participate in the future growth and success of the company. Stock is also referred to as “equity”, whereas bonds are referred to as “Debt”. When a stock is issued by the company or concern, it is selling a part of itself in exchange for cash. When the bond is issued by the company, it is issuing debt by means of the agreement to pay interest over the principal for the use of the money. As a Bond holder you have no voting rights and you do not get a share of the profits of the corporation, however you receive other benefits that you do not get while buying stock in a company.

The stocks are usually divided into two category i.e. equity stocks and preference stocks. Preferred stockholders get preference over common stakeholders. The return on stock is called as dividend while the return on debt is known as an interest. The return on bonds is guaranteed. The risk in stocks is generally higher than bonds. The company first discharges all of its dues at the time of winding up and subsequent to that, the stockholders are paid off with the residual amount. The share markets or stocks, has a centralized trading system or exchange system, but bonds don’t have a centralized trading or exchange system.

Stock Market is two-sided. Firstly, purchasing shares of stock in the company that performs well can mean unlimited earnings for an individual. On the other side you have to be ready to sell your shares or else you wind up losing money before the company takes a turn for the worse. Bond offers a fixed interest rate over the term of the loan so you always know what you will make. The drawback is that during the term of your bond, if the business winds up performing well, you do not acquire to share in profit.

In Both stocks and bonds, Risk is something that is very common. Bonding into comparatively the new corporation is more risky than purchasing stock in a well known corporation that consistently performs well. Even if Bonds offer security at a fixed interest rate, there is always a possibility that the company could go bankrupt. Generally, when you invest in government bonds it will offer the most security but always the lowest returns. In fact the government of the United States and Japan are the largest issuers of the bonds all over the world. The choice to invest in bonds vs stocks comes down to risk acceptance and even whether an investor can take the chance of losing all to win big, or needs a slow stable stream of growth.  Stocks are more appropriate to a higher risk tolerance, whereas bonds will be more suitable to those that can’t pay for the risk.

An advantage of owning a bond over a stock is that generally bond holders are the first people in line to get whatever money is left and/or which can be generated by the sale of the company’s assets. Only after all the other creditors and bondholders are paid, stockholders can get any of their money back. In the case of bankruptcy, more times than not, there is not sufficient money to make the bond holders and other creditors complete, so ultimately stock holders end up with nothing.

Usually the bonds participants are investors, speculators, institutional investors and in stocks participants are market maker, floor trader, and floor broker. Normally many people invest in both stocks and bonds in order to expand. To decide the proper mix of stocks and bonds in your portfolio is a function of your time horizon, tolerance for risk, and investment objectives. By buying debt an investor becomes a creditor to the corporation or government. The main advantage of being a creditor is that you have right of highest claim on the assets than the shareholders, that is, a bondholder will get paid before a shareholder at the time of bankruptcy. Though, the bondholders do not share in the profits if a company does well, then he or she is permitted only to the principal plus interest.