Stocks versus Bonds

Whereas stocks give investors part ownership of a company, bonds are loans made by investors to corporations or governments. Rather than benefiting from company profits the way that stock holders do, bond holders receive a fixed rate of return a percentage of the bond's original offering price. The return is called the 'coupon rate'. Bonds have a maturity date at which time the principal amount is returned. Bonds can be issued for any period of time some take up to 30 years to mature.

Bonds always carry the risk that the principal amount may not be paid back. Companies with higher credit worthiness are more likely to be safe investments but their coupon rate will be lower than companies with lower credit ratings. Credit ratings are provided by firms such as Standard and Poor and Moody's Investor Service. Credit ratings range from a high AAA to a low D.

US government bonds are considered to be the safest type of bonds. Blue chip corporations (those with established performance records that span over many decades) are also very safe bond investments. Smaller corporations have a greater risk of defaulting on their bonds, but bond-holders are preferential creditors and will get compensated before stock holders in the event that the business goes bankrupt.

Bonds can be bought and sold on the open market. Their value fluctuates according to the level of interest rates in the general economy. For example, if you hold a $1000 bond that pays 5% per year in interest you can sell the bond at higher than face value as long as interest rates are below 5%. If they rise above 5%, your bond can still be sold but usually at less than face value. This is because investors are able to get a higher interest rate than what your bond pays so in order to offset the difference your bond has to be sold at a lower cost.

Most bonds are traded in the Over-The-Counter (OTC) market which is made up of banks and security firms. Some corporate bonds are also listed on stock exchanges and may be bought through stock brokers. New issues of bonds are usually sold in $5000 increments while bonds bought and sold after the initial issues are quoted in increments of $100. A bond that is listed at 96 is selling for $96 per $100 face value.

Stocks or Bonds

When deciding whether to invest in stocks or bonds, the risks versus the potentials have to be weighed. Stocks have much greater potential to increase in value but they are also more subject to market fluctuations. Investment grade bonds (those with a rating of BBB or better) carry less risk but offer a relatively low yield.

Most investors agree that for the short term, bonds offer greater security and return. The situation changes, however, when time spans of longer than 10 years are considered. The stock market has consistently outperformed bond investments by a large factor. This is because companies continue to increase in value and any short term fluctuations in the stock market are smoothed out over time.

Bonds still have their place in most portfolios, however. They provide a stable investment which helps to cushion against stock market fluctuation. A mixture of investments including stocks from various industries, bonds and other fixed-income investments is the way to provide maximum growth while securing your investment funds for the future.

Bull Bear Markets
Bull and Bear are the terms to describe the general condi...

Fundamental Analysis
The goal of fundamental analysis is to determine how much money a company is ...

Fundamental Analysis 2
Earnings per ShareThe overall earnings of a company is not in itself a useful indicator of a stock's worth. Low earnin...

Getting Started
Most stock trades are done through a broker an inter...

Penny Stocks
All of these factors low price, lack of standards, and lack of stability make penny stocks one of the ...

Pink Sheets Stocks
Penny stocks are securities that are less than $5 in value. Although they can be traded on regular...


Stock Brokers
These perks are not free full service broker...

Stock Indexes
There are many different stock indexes, the most common in the United States being the Dow Jones Industrial Avera...

Stock Markets
The 'Stock Exchange' is the correct term for the physical location for trading stocks. Each country may have many ...

Stock Options
A contract to buy is called a 'call option'. The buyer of a call option hopes the price of ...

Stock Prices
To a certain extent stock prices are det...

Stock Splits
Why would a company do this?...

Stocks Trading Signals
Investors who treat trading as a full-time job have the time to watch the market movements for ...

Stocks Vs Mutual Funds
What is the advantage of a diversified portfolio? It offers protection against rapid ...

Stock Trading Strategies
HedgingHedging is a way of protecting an investment by reducing the risks i...

Technical Analysis
The basis for technical analysis is the belief that stock prices move in predictable patterns. All the fac...

Technical Analysis 2

Types Of Trading
The stock market also provides opportunities for short-term investors. Market skittishness can cause p...



Site Menu


More Articles