Money is an essential element of life. We work and earn money to get the comforts of life, to educate our children and to increase our standards of living and so on. It is our human nature that forces us to try hard and earn money quickly. Just because of this greed, people invest their hard-earned money in the share markets. Two popular financial instruments that most of us have heard about are stocks and the bonds. Both of these instruments are quite popular with the masses. The basic idea of these instruments is to provide you an opportunity to invest in your money in a specific company and become its investor, so as to maximize your future profits. Both of these instruments are a good alternate of investing the money, but both have different roles to play in the share market.
Investors are aware about the fact that the share market is quite risky, but if it takes your favor, then it can shower the huge profits on you. Stock market news reveals the fact that the long-term investment in the stocks can do better than other asset classes. But on the other hand, during the swinging conditions of the share market, people go for buying the bonds of the corporate and companies since the bonds can adjust the risk. The financial experts suggest that favoring bonds over stocks is not the wise decision. Rather, investors should have multiple assets and they need to consider how one type of instrument relates to another in terms of returns and risks.
Let us now discuss the bonds and the stocks separately.
What are bonds? The answer to this question can be explained with the concept of loans. When you buy a bond, you are actually lending your money to the issuing party. Now this party will have to give you interest in the future. The value of the bonds depends up on the market interest rate of the particular scenario. Bonds are available for selling and purchasing in the open share market. The worth of the money invested in the bonds actually comes from the interest rate that the investors earn on the bonds. If you have a bond that fetches you 4 % interest rate and the market’s general interest rate is going on 3 % then you can sell this bond in the share market at a higher face value than actually you purchased it for.
Unlike stocks, bonds come with limited risk and promise you to get the fixed interest whether the issuing party is doing good business or facing loses. Again, bonds are different from the stocks since bonds have a pre defined time frame. They have a fixed maturity date and after which, it expires. When a bond expires, the principal amount is also returned to the investor. The risk that is involved with the bonds is that the issuing institution may not return the principal amount. To avoid such situations, an investor should invest in institutions that have a sound reputation.
What are stocks? Stocks are the shares of the companies. An investor investing in the stocks become a co-owner of that company. Stocks reflect the stability of a company and an investor, with the view to avoid risk, must invest in the stocks of the company that is reputed and stable. Stocks are available in three categories, i.e. small caps, mid caps and the large caps. These categories decide your stake in the company.
Unlike bonds, stocks fluctuate in the value and its worth is completely dependent up on how the company is performing. The profit on stocks is again dependent up on the performance of the company. With the rising performance of the company, its stock price increases and hence investor gains profits. One can also sell stock with this increased value.
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