| In the world of investments, you’ll often hear | | | | companies are well-established companies that |
| about stocks and bonds. They are both feasible | | | | have proven and successful track records over a |
| forms of investment. They allow you the | | | | long span of time. Of course, such companies will |
| opportunity to invest your money with a specific | | | | have lower coupon rates. |
| company or corporation with the possibility of | | | | If you’re willing to take a greater risk for |
| future profits. But how exactly do they work? | | | | better coupon rates, then you would probably end |
| And what are the differences between the two? | | | | up choosing the companies with low credit ratings, |
| Bonds | | | | companies that are unproven or unstable. Keep in |
| Let’s start with bonds. The easiest way to | | | | mind, there is a great risk of default on the bonds |
| define a bond is through the concept of a loan. | | | | from smaller corporations; however, the other |
| When you invest in bonds, you are essentially | | | | side of the coin is that bond holders of such |
| loaning your money to a company, corporation, or | | | | companies are preferential creditors. They get |
| government of your choosing. That institution, in | | | | compensated before the stock holders in the |
| turn, will give you a receipt for your loan, along | | | | event of a business going bankrupt. |
| with a promise of interest, in the form of a bond. | | | | So, for less risk, choose to invest in bonds from |
| Bonds are bought and sold in the open market. | | | | established companies. You will be likely to cash in |
| Fluctuation in their values occurs depending on the | | | | on your returns, but they will probably not be |
| interest rate of the general economy. Basically, | | | | very large. Or, you can choose to invest in |
| the interest rate directly affects the worth of | | | | smaller, unproven companies. The risk is greater, |
| your investment. For instance, if you have a | | | | but if it pays off, your bank account will be |
| thousand dollar bond which pays the interest of | | | | greater, too. As in any investment venture, there |
| 5% yearly, you can sell it at a higher face value | | | | is a trade-off between the risks and the possible |
| provided the general interest rate is below 5%. | | | | rewards of bonds. |
| And if the rate of interest rises above 5%, the | | | | Stocks |
| bond, though it can still be sold, is usually sold at | | | | Stocks represent shares of a company. These |
| less than its face value. | | | | shares give part of the ownership of the |
| The logic behind this system is that the investors | | | | company to you, the share-holder. Your stake in |
| deal with a higher rate of interest then the actual | | | | that company is defined by the amount of shares |
| bond pays. Thus, the bond is sold at lower value | | | | that you, the investor, own. Stock comes in |
| in order to offset the gap. The OTC market, | | | | mid-caps, small caps, and large caps. |
| which is comprised of banks and security firms, is | | | | As with bonds, you can decrease the risk of |
| the favourite trading place for bonds, because | | | | stock trading by choosing your stocks carefully, |
| corporate bonds can be listed on the stock | | | | assessing your investments and weighing the risk |
| exchange, and can be purchased through stock | | | | of different companies. Obviously, an entrenched |
| brokers. | | | | and well-known corporation is much more likely to |
| With bonds, unlike stocks, you, as the investor, | | | | be stable then a new and unproven one. And the |
| will not directly benefit from the success of the | | | | stock will reflect the stability of the companies. |
| company or the amount of its profits. Instead, | | | | Stocks, unlike bonds, fluctuate in value and are |
| you will receive a fixed rate of return on your | | | | traded in the stock market. Their worth is based |
| bond. Basically, this means that whether the | | | | directly on the performance of the company. If |
| company is wildly successful OR has an abysmal | | | | the company is doing well, growing, and attaining |
| year of business, it will not affect your | | | | profits, then so does the value of the stock. If |
| investment. Your bond return rate will be the | | | | the company is weakening or failing, the stock of |
| same. Your return rate is the percentage of the | | | | that company decreases in value. |
| original offer of the bond. This percentage is called | | | | There are various ways in which stocks are |
| the coupon rate. | | | | traded. In addition to being traded as shares of a |
| It is also important to remember that bonds have | | | | company, stock can also be traded in the form of |
| maturity dates. Once a bond hits its maturity | | | | options, which is a type of Futures trading. Stock |
| date, the principal amount paid for that bond is | | | | can also be sold and brought in the stock market |
| returned to the investor. Different bonds are | | | | on a daily basis. The value of a certain stock can |
| issued different maturity dates. Some bonds can | | | | increase and decrease according to the rise and |
| have up to 30 years of maturity period. | | | | fall in the stock market. Because of this, investing |
| When dealing in bonds, the greatest investment | | | | in stocks is much riskier than investing in bonds. |
| risk that you face is the possibility of the principal | | | | The Wrap-Up |
| investment amount NOT being paid back to you. | | | | Both stocks and bonds can become profitable |
| Obviously, this risk can be somewhat controlled | | | | investments. But it is important to remember that |
| through the careful assessment of the companies | | | | both options also carry a certain amount of risk. |
| or institutions that you choose to invest in. | | | | Being aware of that risk and taking steps to |
| Those companies that possess more credit | | | | minimize it and control it, not the other way |
| worthiness are generally safer investments when | | | | around, will help you to make the right choices |
| it comes to bonds. The best example of a | | | | when it comes to your financial decisions. The key |
| “safe” bond is the government bond. | | | | to wise investing is always good research, a solid |
| Another is the blue chip company bond. Blue chip | | | | strategy, and guidance you can trust. |