Two of the most heard terms in the investing world are ‘stocks’ and ‘bonds’. These two things are very different from each other and are great investment options with their own pros and cons. However, new investors often tend to get confused as to how they are different and what route they should go while beginning their investing career.
In this blog, we will explore the differences between stocks and bonds, learn what each of them is, and how they are different. We hope that by the end of the blog, the reader will have a better understanding of both of them and will be able to make better
What Are Stocks?
Stocks are issued whenever a company goes public. While going public, the owners of the company basically offer their share to the public in exchange for some money. So, when someone buys stocks of a company, they basically buy a share in the company, i.e., own a portion of the company. In other words, if a company has a total of 100 stocks that it offers to the public and a person buys 10 stocks, then that person owns 10% of that company.
The main benefit of buying stocks is that when a company performs great and does great things, the demand for its stock goes up and so does the price of its stock. If someone buys a stock in a company and the company then performs really well over the next few years, the stock price will increase and that person will be able to sell those stocks for a profit.
However, in cases where the company doesn’t perform better, its stock price will go down and the stockholder will have to sell their stocks at a loss. So, one needs to analyze a company and how it will perform in the future to make good profit with trading stocks.
What are Bonds?
A bond is essentially a type of debt that one gives to a company or a government for a fixed period of time. In return, the investor receives interest payments based on a set interest rate over that period and gets the full principal amount back after the fixed term ends.
Governments usually issue bonds of 1 year, 2 years, and go up to 30-year terms. The longer the term, the higher the interest will be. The interest payments are usually received semi-annually.
For example, let’s say a person buys a $10,000 bond from the government with a 5-year term and a 3% interest rate. That person will receive $300 every 6 months and then will get his $10,000 back after the 5-year term. So, that person would have made $3000 in profit over the period of 5 years.
What is Best For Beginners?
Bonds are generally considered to be very safe investments and involve very little risk whereas stocks tend to be more riskier. However, one will need a lot of capital to make sizable profits with bonds whereas the entry cost of stocks is very low. Many professional financial advisors utilize both stocks and bonds in their investment management strategy for better performance and a more diversified portfolio.
Our suggestion is that if you have a lot of capital in hand and are not willing to take any risks with your money, then bonds are the way to go. However, if you are looking to make some serious gains with investing and grow your wealth, then stocks will be your best option.
Without a doubt, bonds are a safe way of making money, but they are a slow way of making money. Whereas with bonds you make a 25-50% profit over a period of 5 or 10 years, with stocks you can sometimes make ten times that profit with a good investment strategy.
In the end, what is good for you will depend on your current situation, your risk tolerance, and your knowledge of the market. Be sure to assess all those factors before making a decision. We hope we were able to deliver some value with this blog and that you learned something from it.
