Which one is a better investment- Bonds or Stocks? Well, this question is same as asking where Oranges are better for health than Apples or vice-versa. While one provides vital vitamin C- a powerful antioxidant that protects our cells from damaging, the other helps reduce the risk of developing cancer, hypertension, diabetes and heart disease. Something similar is the story of Bonds and Stocks.
To understand better we must have to deep dive understanding various facets concerning Bonds and Stocks.
Who can issue stocks and bonds is the first question which comes on any investor’s mind. Well, Stocks are an enterprise commodity hence can only be issued by an organization itself, while bonds can be issued by a corporation or any government organization. For example, to fund on-going projects- New York Municipal Corporation can issue a bond but cannot issue share of stocks. Contrary, any organization for e.g. Google can sell shares of stocks as well as raise funds through issuing bonds.
When you buy a stock- you actually purchase a part of the company and hold ownership in it. This means that as an investor you earn some privileges including the right to vote in critical decision making which can impact organization’s growth. Moreover, when a company earns profit a significant share come to investor’s wallet in the form of dividend. And when a company incur loss the shareholders also incur loss. In one line it can be said that your profit and loss is completely aligned with the performance of the organization. However, stock is the type of investment which has the potential to provide very high dividends to investors but it also brings along the risk factor, which is very high. As stocks fluctuate on a regular basis, no one can precisely predict the fixed returns on it.
Contrary to this, a bond is a fixed income instrument that represents a loan given by an investor to the borrower. On investing in bond you will not buy any ownership in the organization (be it private or governmental), rather you buy a part of the organization’s debt. Moreover you don’t get any voting rights here but do get many advantages which stocks can’t provide. Here the investor earns steady income from the interest on principal amount on regular intervals. At the time of maturity, investor gets back whole principal amount and thus it is perceived to be a safe investment (unless the borrower becomes bankrupt). In this, if an organization makes profit then no dividend get paid to the investor, however, if the organization incurs loss, investor remains protected and the interest and principle payment does not get affected at all. The investor gets his/her money on time. However, bond’s value is connected with the interest rates and these both are inversely proportional to each other.
Bonds are thus considered as a safer bet than stocks while rate of returns are usually higher in stocks as compared to bonds. If we look at the historic data, one can find that stocks have returned approximately 9% per year, while bonds earned roughly 5% due to the high risk factor associated with bonds as respect to stocks.
One more aspect which every investor wants to know is that- what usually happens to their money if the organization gets bankrupt? Well, in case of stocks, unfortunately investors are left with nothing. However, in case of bond- the bond holder always has the first right to get whatever money left after selling company’s assets. Hence, bonds seem like a safer bet.
These all are the vital details which specify and differentiate the types of returns, money security and working details of these financial instruments in good, better or worst times. What is best among both again completely depends upon the financial objectives of an individual investor. Thousands go for buying stocks while numerous across the world bet for bonds. On the other hand, there is a third category of people who want to reap the benefits of both the world and hence invest in diverse portfolio which is again a new concept.
Hence, make your financial goals clear, approach a consultant and discuss your objectives with them, then only take a decision. A right decision can earn you millions while a bad one can prove financially harmful. Therefore, play safe!
– Ashwini Deshmukh