Are Stocks Or Bonds Better Investments?
Stocks or bonds –what should you invest in? There is the school of thought that believes that stocks are better than bonds, while others believe that bonds are better than stocks. Well, this article will make efforts towards presenting you with both sides of the argument and leave you to making an informed decision for yourself.
There are various determining factors that will go a long way towards influencing your decision whether to invest in stocks only, bonds only, or both. Some of the determining factors include the age of the individual, risk tolerance of the individual, and the time period before the retirement of the individual. Below are the merits and demerits of both the stock and bonds.
When a person buys stock, it simply means he has purchased a piece of the company, and he is now a part owner of the business. There are special privileges that come alongside being a part owner.
The most important of which are; you now have a right to making decisions pertaining to the company’s future, and you are now entitled to taking share in the company’s profits, which are paid out as dividends.
When you buy bonds from a company, you become a bondholder. And this does not mean you are now a part owner of the company, rather, you have bought a piece of the company’s debt. You have simply loaned money to the company.
When a company offers bond for sale and you buy, you become entitled to receiving interest and principal payments as agreed, and the company becomes obligated to pay the interests and principal payments as long as they do not go bankrupt. And when they even go bankrupt, whatever is left from the sales of all assets goes first to the bondholders and creditors.
When it comes to volatility, stocks are generally much more volatile than the bonds. Bonds prices are usually a lot stable than the stocks. When you invest in bonds, you are much more certain and guaranteed of the returns.
Unlike bonds, stocks are very volatile and prone to changes caused by various intervening market factors.
However, due to the steady and consistent nature of bonds returns, you do not get to make a lot of money from investing in bonds; unlike investing in stocks where despite the high uncertainty and huge risks, you can get to make a lot from the investment, especially in the long-term because of the potential of huge returns.
With bonds, it is much easier for you to plan for the future. The reason is because of their relatively stable and predictable returns. One can easily plan well for the future and save when he is very certain of his returns in investments.
For instance, if you are already drawing close to getting retired, and have already invested in bonds, you can easily estimate how much you will have in investment returns once you are retired. In the case of stocks, because of their unpredictability, one cannot really plan and estimate for the future. One cannot really predict what the outcome in returns will be, or its lack thereof.
- Inverse Correlation to Each Other
In the past, stocks and bonds have historically moved in the opposite directions to each other. Over the last few years, bonds and stocks are much more correlated in a positive manner. In the last few decades, both stocks and bonds are perceived to have started moving in a similar direction.
- How You Make Profit
For bonds, there are basically two (2) ways one could make profits. They are: capital gains and interest income. Aside from collecting interest on the bonds you have bought, you can also make profits by selling off your bonds at a much higher price rate than the one you paid for purchasing them before maturity.
However, you do not get to make a lot from bonds. The returns are really low when compared to some huge returns you could make from stocks.
But for stocks, you stand to make a lot of money from your investment because the market is very unpredictable. So, there are periods where you do not make anything, and there are other periods where your investment return goes up.
If you invest in stocks, you will make a lot of profits as long as the company you invested in make a lot of profits also. On the flip side, you lose money when the company loses money, and you lose your investment when the company goes bankrupt.
Inflation has a negative effect on bonds, unlike stocks investment that are not much affected negatively by inflation. When you invest in bonds, and the inflation rates are high, it seriously affects the purchasing power of your money.
If for instance you earn 3% on a bond investment, and the inflation rate is at about 4%, your actual real return will be -1%. This means that you will actually lose money as regards to the purchasing power of your money.
When it comes to losing your investment, investing in bonds is much safer than investing in stocks. Regardless of whether the company fares well or not, you get your interest and principal payments as a bondholder, provided they do not go bankrupt.
And even if they go bankrupt, whatever money is left will first be used to pay the bondholders before they can even settle themselves (since the bondholders and creditors are the first in line to be settled).
It is very rare to lose your investment when you invest in bonds, unlike when you invest in stocks. Although loss of investments sometimes happens in bonds investments, they rarely occur. The losses that are more likely to happen in bonds investment is the type that occurs when you sell a bond or bond fund at a price lower than the price you purchased it.
In the case of stocks, you lose all your investments the moment the company you invested in goes bankrupt. Shareholders are the least of the people in line who gets back their money.
Are you interested in investing your money? Truth is there are many investment options available to you but only a few of them will end up being profitable taking into consideration a lot of internal and external factors. If you go online, you will be able to gather enough information on investment plans and policies that would guide you in choosing the best form of investment suitable for you, STOCKS OR BONDS?
Should I Invest In Stocks Or Bonds?
Invest In Fixed-income securities: You make money from treasury bills by lending to a government or company which pays you the interest upfront and you get the original capital back after the tenure elapse. If you buy from a government running a relatively stable economy, your investment is risk free although the profit may not be much. You buy a bond when you invest in fixed-income securities.
Investing In Stocks: Are you looking for an investment that gives good returns? You should consider investing in stocks. What should note is that stock investment is volatile and many people have lost part or all of their investment to fluctuations generated by economic and political trends. As a shareholder, you become a part of the company, its finances and business resources when you buy stocks or equities. This comes with the right to vote during shareholder’s meeting and receive dividends that the company shares out among its stakeholders.
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Buying Mutual Funds: If you invest in mutual funds what you are doing is gathering your money with a number of investors. This will enable you get an expert adviser who would assist in selecting securities that you would invest. All mutual bonds are strategically set up and you can invest in it safely without having prior experience or time to select sound investment.
Other Investment Options: Besides investing in bonds and stocks, there are several business and investment opportunities for beginners. These investment optionssuch as real estate, Futures, FOREX and Binary Option, may generate lots of profit but they come with attendant risks. If you are a beginner, it is better to stick with safer investment programs until you understand the workings around security investments.