Important Differences between Stocks and BondsJun 15, 2021 | 0 Votes by Justo - rate Most investment products enter into two very different categories: stocks and bonds. In this article we shall understand the importance of them and the differences between the two.
Nowadays, financial markets offer a huge amount of different investment products. However, most assets enter into two very different categories: stocks and bonds. In this article we shall understand the importance of them and the differences between the two.
Stocks are ownership stakes
Stocks are the financial instrument that carries ownership interest, issued by the company in exchange for cash. The return on stuck is known as a dividend while interest is the return on debt. Stockholders are considered as the owner of the firm.
Buying stucks basically means that you own a part of a certain company. Stucks are usually bought and sold through brokers, who charge a commission for this service. This kind of flow of funds help companies to grow and to generate higher revenues and profits.
Bonds represent debt
Bonds are debt instruments issued by the company to raise capital with a promise to pay back the money after some time along with interest. Bonds are issued by government institutions, companies and financial institutions, etc. The return on the bond is guaranteed. Unlike stucks, whose return has no guarantee. Bond holders are the lenders to the firm. Bonds are debt instruments. As opposed to bonds, where the trading is done Over the Counter.
When you invest in a bond to hold until maturity, the nominal return is equal to the interest that the maker of issuer promised to pay. Even though if know what the future earnings will be, it is important that we evaluate the possibility that the issuer defaults on said payment and be ready to take actions.
The difference between a bond and a stock is that with the stock, you own the assets of the company, while in the case of owning a bond, you only acquire or buy part of the debt or the issuing company.
There are also variations on the stock and bond concept that share features of both. For example, some bonds have conversion features that allow bondholders to convert their bonds into company stock at certain predetermined ratios of stocks to bonds. Both stocks and bonds has a centralized trading.
Which is right for you
Investing in individual stocks are great for some people but it tends to be a little bit risky. Stock prices fluctuate from day to day and they can fluctuate by a lot. So you could buy a stuck today for $100 and by tomorrow for reasons you might not even understand, the price could go down to $90 or even lower or in the worst-case scenario disappear altogether . If you want to start with something a little safer, bonds may be the best answer. Bonds are much safer than stocks because a bond is like an IOU; you’re lending a company money and it’s promising to pay you back plus interest. That promise, which is legally binding, makes bonds a lot safer than stocks if you want to start investing some money.