Stocks and bonds are two of the most commonly utilized financial investment vehicles. However, bonds and stocks are structured differently which creates different risk and reward qualities. Investors need to understand these differences in order to have the proper balance between the two assets in order to fit the person’s individual investment objectives.
Debt vs. Equity
Both bonds and stocks are known as securities. However, bonds are debt securities while stocks are equity securities. When a person purchases a stock, the person becomes an owner of a corporation, which will include voting rights as well as the ability to share in future corporate profits. On the other hand, when an investor buys a bond, he or she is actually becoming a creditor to the issuer of the bond, which would be either a government or a company. Unlike with stocks, the purchaser of a bond does not have any voting rights and cannot share in profits of the bond issuer.
Bonds Are Less Risky
Bonds are generally considered less risky than stocks. A bond investor is guaranteed to receive his or her initial investment amount when the bond reaches maturity. On the other hand, with stocks an investor is not guaranteed to at least break even. In fact, stocks can appreciate or depreciate in value depending upon the health of the company and various market conditions. If a stock depreciates below what an investor originally paid for the stock the investor will suffer a loss.
Stocks Have More Profit Potential
On the other hand, stocks are generally considered to have more profit potential than bonds. Bonds pay a set amount of interest, while stockholder shares in corporate profits can increase dramatically in some cases. The value of the stock can also appreciate significantly which allows investors to sell the stock back into the market for a quick profit.
The balance between stocks and bonds in an investor’s portfolio will depend upon how much risk the investor is willing to take. Generally, those who are older and may be looking to invest for retirement purposes may want to consider bonds. Those who are younger and are looking to obtain quicker returns may be more willing to take on additional risk in the stock market. However, no matter where a person is in his or her life, each portfolio should be customized to fit each specific situation.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.