TomorrowMakers

Know these facts about Stocks and Bonds to invest right

Stocks vs. Bonds These facts can make you richer

Ever met a friend after a few years and seen his lifestyle change? If you have, the chances are he invested in stock - that is what stocks can do for some. 

What are Stocks?

Stocks are representations of equity in a company. If you buy stock, you own a small piece of the company - one or more "shares." Stocks are volatile, and hence the other way around is also possible. 

What Is a Bond?

A bond is a loan to a government or a company. There is no equity involved, and there are no shares to own. In contrast, bonds are an asset class that is stable and predictable - there is no excitement or thrill attached to them. 

However, investors should own both asset classes when it comes to investment - the distribution per cent can vary from investor to investor. 

The question that commonly arises is which one to opt for when it comes to investing right & getting clarification about bonds vs stocks. The answer is both! Let us look at why you need to own both asset classes:

Capital Gains - When you invest in a stock, you own a part of the company. If the company does well, the price increases, and you can sell at a higher price and make profits. You may end up losing your money if the company performs poorly, the share price drops, and you may end up losing money. Sometimes, the share price is not directly proportional to the company's performance - even if the company is not performing well enough, the share price can increase.

When you invest in bonds, the return per cent is pre-decided - you are going to receive 5% or 6% on your investment. If the company does not default, you will receive your amount at the end of the agreed period.

Dividend Payments - You also earn from the dividend income when you invest in a company. Most companies share their profits with investors by paying a dividend. Some companies pay a dividend as high as 6 to 10% annually. 

When you invest in bonds, there is no way to get additional income.

Also read: 19 Investing Tips Every Beginner Should Follow Listicle

Potential in wealth - Based on the above information, it is clear that you should invest in stocks if you want to create wealth. If you can pick the right stocks, they can create wealth for you over time. On the other hand, if you want to preserve your wealth, bonds are a perfect choice - since the chances of losing money here are minimal.

Who issues stocks and bonds?

When the company wants to raise fresh funds, it has two options - it can either go to a bank for loans or to the public. When the company goes public, it launches its Initial Public Offering (IPO). This process gives stocks to the interested investors in return for money. So stocks are issued by the companies.

Alternatively, bonds are issued by corporations and the government (central).

Socks vs Bonds: Which option is riskier?

You must know by now that investing in stocks comes with high risk since you can lose a significant part of your capital if the company does not perform well or goes bankrupt. Bonds are much safer though there is a small chance of issuer defaulting. Thus, one should have a good risk tolerance level while investing.

What if the company goes bankrupt?

If the company goes bankrupt, the banks that issued the loan get paid first. Once all the banks have received the amount, bondholders get paid. Third on the list are those who owned preferred stock which is an asset class that has both stocks and bonds. Last on the list are common stockholders.

Also read: Looking For Ways To Save Tax Long-Term Capital Gains? Here are Some Solutions

Conclusion

The above information makes it clear that investors should have an investment in both asset classes to maintain a balance. Even though both instruments can grow your money, their methods and returns are very different.

Ever met a friend after a few years and seen his lifestyle change? If you have, the chances are he invested in stock - that is what stocks can do for some. 

What are Stocks?

Stocks are representations of equity in a company. If you buy stock, you own a small piece of the company - one or more "shares." Stocks are volatile, and hence the other way around is also possible. 

What Is a Bond?

A bond is a loan to a government or a company. There is no equity involved, and there are no shares to own. In contrast, bonds are an asset class that is stable and predictable - there is no excitement or thrill attached to them. 

However, investors should own both asset classes when it comes to investment - the distribution per cent can vary from investor to investor. 

The question that commonly arises is which one to opt for when it comes to investing right & getting clarification about bonds vs stocks. The answer is both! Let us look at why you need to own both asset classes:

Capital Gains - When you invest in a stock, you own a part of the company. If the company does well, the price increases, and you can sell at a higher price and make profits. You may end up losing your money if the company performs poorly, the share price drops, and you may end up losing money. Sometimes, the share price is not directly proportional to the company's performance - even if the company is not performing well enough, the share price can increase.

When you invest in bonds, the return per cent is pre-decided - you are going to receive 5% or 6% on your investment. If the company does not default, you will receive your amount at the end of the agreed period.

Dividend Payments - You also earn from the dividend income when you invest in a company. Most companies share their profits with investors by paying a dividend. Some companies pay a dividend as high as 6 to 10% annually. 

When you invest in bonds, there is no way to get additional income.

Also read: 19 Investing Tips Every Beginner Should Follow Listicle

Potential in wealth - Based on the above information, it is clear that you should invest in stocks if you want to create wealth. If you can pick the right stocks, they can create wealth for you over time. On the other hand, if you want to preserve your wealth, bonds are a perfect choice - since the chances of losing money here are minimal.

Who issues stocks and bonds?

When the company wants to raise fresh funds, it has two options - it can either go to a bank for loans or to the public. When the company goes public, it launches its Initial Public Offering (IPO). This process gives stocks to the interested investors in return for money. So stocks are issued by the companies.

Alternatively, bonds are issued by corporations and the government (central).

Socks vs Bonds: Which option is riskier?

You must know by now that investing in stocks comes with high risk since you can lose a significant part of your capital if the company does not perform well or goes bankrupt. Bonds are much safer though there is a small chance of issuer defaulting. Thus, one should have a good risk tolerance level while investing.

What if the company goes bankrupt?

If the company goes bankrupt, the banks that issued the loan get paid first. Once all the banks have received the amount, bondholders get paid. Third on the list are those who owned preferred stock which is an asset class that has both stocks and bonds. Last on the list are common stockholders.

Also read: Looking For Ways To Save Tax Long-Term Capital Gains? Here are Some Solutions

Conclusion

The above information makes it clear that investors should have an investment in both asset classes to maintain a balance. Even though both instruments can grow your money, their methods and returns are very different.