Stocks vs Bonds
For an ordinary investor, stocks and bonds are both forms of investment as they earn money for him. If we look from the perspective of companies, both stocks and bonds are instruments with which companies acquire funds for their operations. These are issued by companies between common people to raise funds. It is amazing that people do not understand the basic differences between the two instruments as they are concerned more with the return on their money. Both stocks and bonds are floated by companies and are traded in the share market. Interest rates on both stocks and bonds fluctuate and are subject to market forces.
Companies are always in need of money and they realize it in many different ways. One of them is through selling stocks. The development works of any company cannot be completed without raising capital by selling stocks. For this purpose, companies target small investors. The place where they are able to get customers for their stocks is stock market.
When you purchase stocks, you are actually having ownership in the company. Your fortunes now get linked with the performance of the company and any profit or loss of the company is yours. This implies that there is inherent risk in all stocks though the stocks of some companies are safer than those of others. As you become a stake holder, you get dividends in the ratio of stocks you hold. Stocks have the potential to earn attractive returns if they are of an established company.
On the other hand, stocks can also be risky if your selection of company is not prudent and it starts to make a loss as against anticipated profit. Stocks present a very attractive option to an investor in terms of return of investment in the shortest possible time.
Bonds are instruments used by companies to raise capital for their development. These are for a specified time period and carry interest with them. This is, in other terms, debt that the company secures from common people. Bonds always pay interest to bondholders. Generally, a fixed interest is paid every six months. If you have bonds issued by a company, it doesn’t mean you have any ownership in the company. After the expiry of the term, the company pays back the principal amount to the bond holder.
Unlike stocks, bond holders do not get any dividends. They do not get high returns when the company makes huge profits. They are entitled to a fixed interest only. All bonds have a maturity date and some bonds have a very long duration of 30 years. Bonds can be bought and sold in the open market like stocks
Both bonds and stocks are investment tools for a common investor and he has to decide what he is looking for. A safe and fixed return on his investment, or is he willing to take risk and prepared to float with the fortunes of the company. Stocks carry much higher potential in comparison to bonds but they are risky as well. Bonds give lower returns but they are safer than stocks. In my opinion, if you are investing for a short period, bonds are safer. But if you are a long term investor, you should go for stocks as stocks have traditionally outperformed bonds in the long run. For a complete portfolio, an investor needs to have both bonds and stocks to get a better return on his investment and also to safeguard his interests.
Both stocks and bonds are good forms of investments and any investor would do well to keep a healthy mix of the two to keep his investments safe.