New Investors Guide to Differentiating Stocks from Bonds

Finance has numerous subdivisions. At times, it seems a bit hard to keep up with all the nuances involved. When it comes to investing, there are lots of jargon that one needs to be adept with. Stocks and bonds are two of the most commonly heard terms in the investment world. Interestingly, not many people can ably distinguish the two apart. We provide the break down on just how the two terms are applied in the contemporary business scene.

Stocks Buy Ownership, Bonds Buy Debt

Stocks stand for a piece of ownership in a listed company. Usually, stocks are referred to as equity. Companies that have gone public like General Motors, Google and Netflix sell their shares to the masses. To acquire those shares, you need to part with some cash that would facilitate the listed companies to further advance their agenda. In retrospect, you get a slice of what the company is worth.

Should the listed company make a killing, and profit from their ventures, you stand to gain a considerable increment in ownership value. If a company tanks, then you lose a stake in your ownership value. At time, companies face complete meltdowns and capsize. When that happens, one can lose everything altogether. Generally, stock prices tend to fluctuate overtime depending on how well the company is performing.

When one makes a bond purchase this means that, they are dedicating their funds to loan a company/government money. Thus, instead of making an investment in a company as in the case of stocks, one gives out money and they are repaid back in terms of interest. The interest paid out is also referred to as ‘coupon’. Usually, coupons are paid out at set dates and intervals.

Bonds often have maturity dates. The value on the bonds is heavily dependent on what the interest rates are like. Thus, one can get more or less depending on the value of the interest rates. Given the vagaries of bonds, they are called fixed-income securities. One can ably acquaint oneself with the intricacies of the financial world by checking out Overheadwatch.com.

Stocks are Riskier

While one stands to make a killing once their investment choices work out, there’s also the very real possibility of making losses. Not every company is Google or Netflix, investing in some startups can prove to be a money-losing venture. Thus, one needs to conduct thorough research on a company’s method of operation before dedicating funds to that enterprise. Feasibility studies can help shed light on so many factors that can influence the general outcome.

Statistics shared by Zacks, stocks have earned between 9.18% annually from 1959 to 2008. On the other hand, bonds have a return of 6.48% in the same period. While the data shows that stocks have the upper hand on bonds, the devil lies in the detail.

Careful analysis reveals that large percentages emanate from the most successful companies. Of course, several companies tanked along the way and disappeared with vast sums of people’s monies. As a rule of thumb, never invest all your funds in a single company.