Stocks Versus Bonds

The main difference between a stock and a bondgreater risk of defaulting on their bonds, but
is that stock gives you part ownership in abond-holders are preferential creditors and will get
company whereas bonds are loans made by ancompensated before stock holders in the event
investor. Rather than benefiting from companythat the business goes bankrupt.
profits the way that stock holders do, bond3. Selling Your Bond
holders receive a fixed rate of return – aBonds can be bought and sold on the open
percentage of the bond's original offering price.market. Their value fluctuates according to the
The return is called the 'coupon rate'. Bonds havelevel of interest rates in the general economy. For
a maturity date at which time the principalexample, if you hold a $1000 bond that pays 5%
amount is returned. This makes bonds a moreper year in interest you can sell the bond at
reliable investment, but they provide less potentialhigher than face value as long as interest rates
reward.are below 5%. If they rise above 5%, your bond
1. Risk vs Rewardcan still be sold but usually at less than face value.
Although bonds typically have less risk than theirThis is because investors are able to get a higher
stock counterparts, that doesn't mean they can'tinterest rate than what your bond pays so in
flop – bonds can still end up giving you noorder to offset the difference your bond has to
money at all. Companies with higher creditbe sold at a lower cost.
worthiness are more likely to be safe4. OTC Markets
investments but their coupon rate will be lowerThe vast majority of bonds can be traded over
than companies with lower credit ratings. Creditthe counter through banks. Some corporate
ratings are provided by firms such as Standardbonds are also listed on stock exchanges and
and Poor and Moody's Investor Service. Creditmay be bought through stock brokers. New
ratings range from a high AAA to a low D.issues of bonds are usually sold in $5000
2. Governmnet Bondsincrements while bonds bought and sold after the
US government bonds are considered to be theinitial issues are quoted in increments of $100. A
safest type of bonds. Blue chip corporationsbond that is listed at 96 is selling for $96 per $100
(those with established performance records thatface value. For this reason, unless you are ready
span over many decades) are also very safeto make a big investment, you should probably
bond investments. Smaller corporations have astick to stocks.