Stocks & Bonds. What is the Difference?
When most people think about investing, they automatically think of stocks and bonds. But what is the real difference between these two types of financial instruments? In this blog post, we will discuss the key features that make stocks and bonds different. Read on to learn more!
What are the differences?
Stocks are pieces of a company that are available for public purchase. They give the holder a stake in the company and entitle them to voting rights and eligibility for dividends.
Bonds, on the other hand, are loans that investors give to corporations or governments. The borrower agrees to pay back the loan, with interest, over a fixed period.
- A stock is considered an equity instrument, while a bond is considered a debt instrument.
- Companies issue stocks, while government institutions, financial institutions, and corporations issue bonds.
- Dividends on stocks are not guaranteed and are dependent on company performance. The board of directors may decide not to distribute a dividend, despite making substantial profits. A bond, however, has a fixed return that must be paid regardless of the borrower’s performance. As a result, the bonds are guaranteed to be returned.
- On important matters, stockholders have priority when it comes to voting rights. A bondholder is a creditor and does not have voting rights in the company.
- Because stocks don’t have fixed returns or proportional returns, they are riskier than bonds, which have fixed returns. Credit rating agencies also rate bonds, making them more structured before investing.
- In contrast to bonds, where trading takes place over the counter (OTC), stocks have a secondary market.
Investing in stocks and bonds
While both instruments seek to grow your money, the way they do it and the returns they offer are different.
To balance risk and opportunity for reward, the best investing strategies mix stocks and bonds. In addition, you don’t have to invest directly in individual stocks and bonds. Funds such as mutual funds and exchange-traded funds can also invest your money in a variety of stocks, bonds, and alternatives.
The old age “don’t put all your eggs in one basket” certainly holds true. Shares offer greater potential for growth, but also a greater risk of losing money. In general, bonds are less risky, but they offer lower returns. In addition to protecting your portfolio from market swings, bonds can also protect it from inflation. Their performance is usually opposite that of shares. As a result, bonds tend to perform well when shares are performing poorly, although this is not always the case as in the current market downturn where stocks have had their worst start to the year in 50 years and bonds have had their worst start to the year in 25 years.
So, which is the right investment strategy for you? It depends on your goals, your timeframe, and how much risk you’re willing to take. Both stocks and bonds have their place in a well-diversified portfolio, so it’s important to mix them up. And if you don’t want to invest in individual stocks and bonds yourself, there are plenty of funds that will do the work for you. The bottom line? Diversify your investments and don’t put all your eggs in one basket! If you’re feeling lost or just need a second opinion, talk to an investing professional. They can help steer you in the right direction and give you peace of mind about your financial future.
This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
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