Saturday, 27 December 2014

The Differences between Bonds and Stocks

Bonds, Shares, Stocks, Finance
Do you know the differences between bonds and stocks?

Bonds and stocks have various differences. I have met people who own stocks and others who have bought bonds. Unluckily, some of them do not understand what they own! 

This article will provide an incisive look into the differences between bonds and stocks to ensure you are conversant with your investments. 


Here are TEN differences between stocks and bonds. 

  1. Stocks offer ownership based stake for investors and company while bonds are similar to loans extended to the company. In most cases, the stock of a company is issued during the Initial Public Offering (IPO) or even after the equity-based sales. Both governments and corporations can borrow money by selling bonds.

  1. Some companies rely on selling stocks to investors to raise additional capital for expansion. Bonds are less risky and more volatile than stocks. 

  1. Stockholders receive dividends when companies declared dividends. Dividends represent a share of profit given to stockholders. Dividends are not guaranteed. Bonds pay guaranteed interest lest a government entity or corporation becomes bankrupt.

  1. In the event of a bankruptcy, bonds are more secure than bonds. If you are a starter, it would be advisable to invest in bonds as opposed to stocks. Remember we invest that which we can afford to lose.

  1. Bonds and stocks are financial tools for investors to obtain a return and for firms to obtain capital.

  1. A bond has been defined as a debt based security in which the authorized issuer owes the bondholder a debt and, therefore, is obliged to pay the principal amount plus interest, in future. On the other hand, the working definition for stocks will be: issued and distributed shares, either by a corporation or joint stock company for raising capital.

  1. Bond markets as opposed to stock markets and share markets have no centralized trading or exchange system. In a bond market, investors trade (buy & sell) debt securities while in a stock market, people trade equity securities such as common stocks as well as derivatives (futures, options et cetera). Stocks are traded on the stock market. In Kenya, we have the Nairobi Securities Exchange (NSE). These markets are usually regulated. Bonds are sold Over-The-Counter (OTC) while stocks are sold in central exchanges or places.

  1. Corporations issue stocks while either government entities or corporations issue bonds.

  1. Bonds and stocks are some of the financial instruments for investors like me and maybe you and other financial market stakeholders, who participate in the process of obtaining returns and raise capital. Investors use bonds and stocks as classes of assets in their portfolios.

  1. Bonds are fixed-income investments since they repay interest semi-annually. They are popular amongst retirement investors. Stocks that pay dividends are also provide good insurance and retirement portfolios.
When deciding whether to invest in bonds or stocks, it is important to consider your investment goals and needs. The standard asset allocation approach postulates that if you are in your 20s and 30s, you should have about 50%-75% of your portfolio in stocks for price-appreciation potential. As you get older, you should reduce stock investments and purchase more bonds to about 80% of total portfolio due to the risk factor.

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