Stocks & Bonds

Stock-Market.jpgStocks and bonds are two major classes that are used by investors as part of their portfolio. While they are both used as part of investor’s portfolio, they exhibit various similarities and differences but the differences are more than the differences. In my opinion, I prefer stocks to bonds when it comes to investment. Stocks are equity instruments (represent an ownership interest in a corporation) while bonds are debt instruments- long term debts in which the issuing corporation promises to pay on a certain date.

In terms of ownership, the stockholder possesses or owns a part of the issuing company -have an equity stake. This means that he can benefit from the dividends shared from the company’s profit as he is a stakeholder. The bond holder is the lender, creditor or the corporation that lends the bond to the debtors.

Stocks have a centralized exchange where all orders are routed to one central exchange with no other competing market while bonds have a decentralized exchange. The bond exchange is usually over-the-counter. Investors can diversify, buying stocks of different companies all in one market. The returns for stocks are dividends shared among the stakeholders, which are normally more favourable and less volatile. For bonds, the returns are interests that are more vulnerable to external factors that may cause fluctuation or/and negative changes in the interests.

As much as stocks have a higher risk than bonds, they also have higher returns than bonds. Preferred stocks have a higher yield than bonds to compensate for the higher risk; also, they generally have a lower par value than bonds, thereby requiring a lower investment. In cases of company’s annual general meetings and voting, stockholders are given the privilege to vote, unlike the debtors possessing bonds who do not participate in any decision-making regarding the corporation issuing them.

Stocks are issued by companies (mostly listed companies) while bonds are usually issued by government and financial institutions.

The main aim of bonds, as debt instrument, issued by the companies is to raise capital with a promise to pay back the money after some time along with interest. The interest remains fixed from the time of issuance. For stocks, the dividends can increase as the company’s profit margin increase.

Bonds are long-term which means, the returns are gotten after completion of the maturity period. This discourages some investors who want to earn money after a short period of time. Bonds only favours risk-averse investors, who prefer a known periodic payment structure (i.e. coupon payments) for a limited time frame. Investors who are willing to take on greater risks for more returns would prefer the benefit of having partial ownership in a company and the unlimited potential of a rising stock and end up investing in stocks. The possibility for high returns is greater with stocks.

Both bonds and preferred stocks are affected by the volatility of interest change. Prices fall when interest rates rise because the future cash flows are discounted at a higher rate and offer a better dividend yield. The opposite is true when interest rates fall. Both stocks and bonds allow investors to convert either security into a fixed number of shares of the common stock of the company, which allows them to participate in the firm’s future changes, development, and growth.

Preferred stocks add more value to a portfolio than bonds. This is due to today’s low-interest rate environment which favours them. I would advise investors to invest in stocks for quick and safer returns.

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