Bonds vs Stocks
Bonds and stocks are two of the most common asset types. For anyone interested in investments, one of the most important distinctions they need to learn is the difference between bonds and stocks. They both represent powerful, highly rewarding investment opportunities and, knowing how to invest in them are viable investment options to be considered.
How Stocks and Bonds Are Similar
For starters, there are similarities between bonds and stocks. They are both great investment asset types and give investors returns on their investments. They are also two options available to any corporation looking to raise capital to grow their business. Both stocks and bonds can pay dividends, usually quarterly. That is where the similarities end. With bonds, the issuing corporation takes money from investors as a loan and then pays back the principal with interest after a specific time. When investors buy a corporation’s stocks, they are essentially buying ownership or a part of the company in exchange for cash and this grants them the opportunity to become stakeholders in the corporation.
The Differences between Stocks and Bonds
There are very useful differences between bonds and stocks that are financially relevant to investors. One of the main differences is that with bonds, an investor gets back their principal whereas, with stocks, an investor gets dividends on the investment but doesn’t get back the principal. Generally, stocks are riskier than bonds. However, stocks are more profitable over the long term than bonds. The returns on bonds are more guaranteed than those of stocks.
How to Invest in Stocks & bonds
If you buy 100 shares out of 1000 outstanding shares of a company, it effectively means that you own 10% of the company’s future earnings and cash flows. It also means that you have 10% voting rights for that company. You should buy the stock of a very good company with transparent financial policies as that would guarantee consistent, profitable growth and returns on your investments. You can buy stocks online or through brokerage firms that simplify investing or you could invest in mutual funds or ETFs which have a good record of high returns.
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Trading bonds is much more complicated as they are not traded on central stock markets. Again, you can decide to invest in bond ETFs or mutual funds using trusted brokerage firms. With bonds, your initial investment at issuance of the bond called the principal is to be paid in full to you on the maturity date of the bond. Within that time, you receive regular dividends called coupons expressed as a percentage. There are therefore low and high coupon bonds and indeed zero-coupon bonds, which pay no interest at all. Once your coupon is higher than the inflation, you would make a profit.
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Why Should I Bother?
In the case of liquidation and repayment of monies, bond owners are more likely to receive their monies. However, stock owners are likely to make more rewards when profits come. Whichever you choose to settle for, it is a personal choice. If you have a high-risk appetite and are looking to make more money, you can try stocks. If you want safer, longer-term investments, then bonds are for you. If you want the best of both worlds, you can always mix it up with a diversified ETF or mutual fund.
Either stocks or bonds, you need to know the potential benefits and risks of each to assure yourself of making the best investment choice and maximizing returns.
