There are a plethora of assets investors can choose to grow their wealth. Two of the most known and understood assets in the investment world are stocks and bonds. Stocks and bonds are trusted assets that have proven returns in the long run.
Asset managers and investment gurus recommend stocks and bonds as the best place to start your investment journey. Whether you are starting or have a growing portfolio, there are ways to trade stocks and bonds to suit your investment needs.
You can find out more about stocks and bonds to trade by visiting buystocks.co.uk. However, to the novice investor, they might not know the difference between stocks or bonds. There are also risks associated with both assets, and it’s wise to understand where you’re placing your money.
We’ll take a brief look at what are stocks and bonds, what makes them similar, and the investment risks.
What are stocks?
A stock, sometimes called a share or equity, is a certificate of ownership in a company. A certificate represents fractional ownership of a company listed in a marketplace called the stock market.
Each owner of stocks in a company has access to voting rights towards the interest of the company. Furthermore, stockholders receive benefits for investing in a company by earning a percentage of company profits called dividends.
Dividend amounts change annually depending on the company’s performance. Large companies with a solid performance history generally pay high dividends either annually or per quarter.
Stocks can be bought or sold via a stock market or exchange. Companies list on a stock market and issue stocks to raise capital for business expansion.
Types of stocks
There are several kinds of stocks investors can purchase, each with specific characteristic:
- Common stocks: These represent the unit of ownership of a company
- Preferred stocks: Preferred stocks give preference over common stockholders like earlier dividend payments.
- IPO stocks: IPO (Initial Public Offering) stocks are when a company first lists on an exchange.
- Blue-chip vs penny stocks: Blue-chip stocks are stable large corporations, while penny stocks are highly volatile small businesses.
What are bonds
Simply put, bonds represent debt. Bonds are a certificate promising the lender a fixed interest payment. An investor who purchases a bond is loaning money to a company or government. The company will repay the loan to the bondholder over a long-term period between 10 and 25 years.
Bond interest rates are based on the general interest rate at the time of purchasing the bond. Bonds are safer than shares. If a company goes bankrupt, bondholders get paid out before shareholders.
Types of bonds
There are several types of bonds an investor can choose:
- Corporate bonds: These are bonds issued by companies that usually have a high interest rate.
- Treasury bonds: Treasury bonds are bonds issued by a government. These bonds are a stable investment but come with a lower interest rate.
- Municipal bonds: Here, we have bonds that a city or state issues to raise money. Interest rates are modest but are exempt from tax.
- Mortgaged-backed securities: A mortgage-backed security is a bond secured by real estate loans.
What are the differences and similarities?
Now that we know what stocks and bonds are, let’s look at what makes both similar and different.
The similarities
Stocks and bonds both trade via a market or exchange. They can be bought or sold regularly like with day trading or held over a long term like a pension fund.
Both stocks and bonds are certificates that guarantee the holder’s stake in the investment, even though they invest in different.
The differences
Stocks are ownership in a company, while bonds represent a loan paid back to the holder over time.
Stocks generate income via dividends and selling your share at a profit, also known as capital gains. However, bonds generate income through interest payments. Bonds can also mature after 10 to 25 years and pay out the full amount.
During the event of a bankruptcy, stock and bondholders receive different treatment. Bondholders are the first to be paid out. Although, employees and government agencies may be a higher priority.
What are the investment risks?
Whether you invest in stocks, bonds, or both, they carry risk. Let’s look at the various risks associated with each:
Stock investment risks
- Companies can go bankrupt
- A tarnished reputation can drop the share price
- Supply Chain disruptions will negatively affect revenue
- A company’s product or service may become obsolete or unpopular
- Government regulation can impact company operations
Bond investment risks
- bonds can be recalled, and your investment returned to you, particularly with corporate bonds
- As bonds are more stable than shocks, they generally yield lower returns
- High-yield bonds are volatile
- Bonds are subject to interest rates. If the interest rate rises, bonds price fall
Final thoughts
Stocks and bonds over many decades prove to be solid investment assets for long-term growth. Both bonds and stocks have their differences and risks associated with them. New investors are encouraged to learn about stocks and bonds and analyze which asset suits their current investment needs.
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