Stocks vs. Bonds: What’s the Right Choice for You?

So, you want to compare bonds vs shares? In very simple terms, bonds allow you to lend your money to the government or companies. Stocks, on the other hand, will let you own a piece of a company.

Both these investments have their own pros and cons, so how do you choose between them? Well, the best way to tackle choosing is by listing out the differences and understanding the characteristics of each option. So, let’s explore the difference between stocks and bonds and how you can choose what’s right for you.

However, before you learn about stocks and bonds difference, please note that an overview of these investment types is not enough to create a holistic investment plan. Please be sure to thoroughly research the specific bond or stock you’re interested in before investing.

What Are Stocks?

Think of stocks as pieces of a company. The owners can sell their ownership to the general public (retail investors) to raise the money they need. The buyers become part owners of the company since they just bought company shares. They can then sell their stocks to get a return on their investment. This is primarily how stocks work. 

To summarise, stocks are an equity-oriented investment medium. Your investment gives you something in return, such as the stocks of that particular company. Public or private companies generally issue stocks.

The government or non-government organisations (NGOs) generally cannot issue stocks traded on the secondary stock market. Here are some of the characteristics of stocks to help you better understand how they work.

Characteristics of Stocks

• Ownership: Stocks allow you to own shares of a company. It is the same as using your money to buy a product; what you purchase is yours to keep or sell whenever you want.
• Returns: Stocks offer a high return potential as they are market-linked. A company’s performance can lead to an increase in the share price, which can be profitable for shareholders. 
• Dividends & Capital Gains: Stocks allow investors to make two types of returns: capital gains and dividends. For example, when you purchase a share at ₹10 and sell it at ₹15, your profit is known as capital gains. However, this is only possible when you sell your share (cash in on your investment). There’s another type of return offered by stocks, which is dividends. When you hold the stocks of a company over a significant period, you can become eligible for dividends. Shareholders are eligible to receive a part of the company’s profits for being a part owner of the company; this is known as dividends. This payout is received for not selling your investments, so stocks offer returns for both holding and selling investments.

• Volatility: Changes in government policy, international geopolitical tensions, global events or crises can all impact the price of a stock trading on stock markets. So, seemingly unrelated global events can impact the returns on your investment.
• Risk Factor: Market-linked investments have a higher risk compared to non-market-linked investments. This also means market-linked investments such as stocks have a probability for higher return since the investor is taking on more risk.

What Are Bonds?

How would you like to have the opportunity to lend your money to the government? (Besides the taxes you already pay), that’s a bond; in this specific case, it’s called government security, which is a type of bond.

When you invest in a bond, you get your money back with interest. The interest is paid out regularly, such as annually or quarterly. The principal amount is repaid when the bond matures.

Bonds, as you guessed, are a debt-oriented investment option, which is one of the primary stocks and bonds difference. They offer low-risk returns as the interest rate can be predetermined, allowing investors to earn a fixed income from their investment.

Bonds are also generally not market-linked, which means they are less volatile than equity-oriented investments. Governments and non-government organisations issue them in most cases. However, a corporate organisation can also issue bonds.

Characteristics of Bonds

• Fixed Income: The interest rate of a bond, also known as the coupon rate, is predetermined, which allows investors to calculate their lifetime earnings on their investment till maturity at the time of investment. So, this creates an opportunity of fixed income for investors.

• Fixed Maturity: The maturity date of a bond is also predetermined at the time of issuance. This ensures investors know exactly when they are expected to get their principal sum back. This helps investors pre-plan their future investments and create a long-term investment strategy.

• Low-Risk: Bonds can be issued by both governments and corporates. Government bonds are very low-risk since governments are less likely to fail on their bond payments. However, in some cases, corporate bonds from low-rated companies may carry payment default risks, hampering your overall investment returns.

• Regular Payouts: The interest payout of a bond is regular, ranging from monthly to annually, based on the type of bond. This allows investors to have a regular source of income through the interest payouts directly from their investment.

Difference Between a Bond And a Share

So, now that you know what a bond and a share are, let’s put them against each other to understand the difference between a bond and a share.

Conclusion

With this detailed look into the difference between stocks and bonds, you now have the necessary details to make an informed decision. However, please check out and compare the specific bonds or stocks with each other before investing to ensure you’re putting your money to the best use. While pitting bonds vs shares, you must have also noticed both these investments have their own merits. So, make sure you also consider diversifying and investing in both to maximise your risk management and investment return potential.