Business professionals and everyday Americans alike are becoming more and more interested in the stock market. However, they probably heard from the grapevine that investing in stocks takes a lot of research and risk. For that reason, they may invest in bonds for a “sure thing.”
Although these sentiments are correct, they don’t show the whole picture. If you want to invest your money in stocks or bonds, but you aren’t sure what to choose, keep reading.
What are stocks?
A stock is an equity security that’s traded on the stock exchange. A stock represents the partial ownership of a corporation. It entitles the stockholder to a portion of that corporation’s assets and profits equal to how much stock they own. They typically outperform other investments.
What are bonds?
A bond is a fixed-income instrument/security that represents a loan made by the investor to the borrower. The investor lends the borrower money for a set amount of time. At the end of that time period, the investor would receive their money back and any interest incurred.
How to decide where to invest your money
The investment game can be difficult to navigate, but bonds and stocks are pretty straightforward. Here are a few things you should consider before investing your money.
Bonds are less risky than stocks
Learning where to invest can greatly impact your returns because the amount of money you’ll receive is dependent on what you choose. Since bonds are a more conservative investment (especially Government Bonds), your percentage yield will be far less than with stocks.
However, if you really want to invest in a sure thing, Government Bonds are guaranteed to issue you a return unless there’s a war or a market crash. Then you have bigger problems to worry about.
Stocks offer higher returns
With great risk comes a high reward, and the reward can be pretty significant if you do your research and get a little lucky. Stocks are a better long-term investment strategy because cashing out early comes with high taxes. Avoid using the stock market as a “get rich quick” scheme.
Large stocks, on average, have returned 10% per year since 1926 provided their long-term. On the other hand, long-term government bonds, while safe, only return 5-6%.
Equity (Stocks) vs debt (Bonds)
Stocks are an equity asset, meaning companies use investments from their shareholders and partners to raise capital. Bonds are a debt asset, meaning you’re acting more like a bank than a public partner. Equity assets offer a share of the company, whereas debt assets do not.
Although both equity and debt markets owe you for investing in them, if a stock falls, you’ll likely lose money on your investment. With bonds, you’re almost guaranteed to get your money back.
Capital Gains (Stocks) vs. fixed income (Bonds)
Stocks and bonds generate capital in different ways. To make money from stocks, you have to sell them for a higher price than what you bought them for. This generates a profit of “capital gains.” You can use that money to invest in the stock market, or you can cash it out whenever.
Bonds can be sold for capital gains, but they typically have an end date. For example, treasury bonds will generate interest upon maturity. Bonds gain you a fixed income over a long period.
When in doubt: Diversify your portfolio
Stocks and bonds have their own strengths and weaknesses. If you’re a young investor, then usually you can take more risks on the stock market. If you’re close to retiring, you should focus on safer stocks, bonds, or mutual funds, which diversify your portfolio with help from a broker.
No matter your age, diversifying your portfolio is a good idea. Not only will you further protect yourself against stock decline, but you’ll always have bonds to rely on when you’re older.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.
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