Several investors are always wondering whether to invest in stocks or bonds. Well, there is no clear cut here but a deep understanding of both is required before a proper decision is made.
Experts say that making a decision between investing in stocks or bonds is one of the most basic tasks but indeed confusing for many investors. Let us understand the two be definition first:
Stocks or Bonds? – Question That Still Stands
A stock is a security which signifies some ownership in a corporation. It also represents some claim on a part of the earnings and assets of the corporation.
A bond, on the other hand, is an investment where the investor lends some money to a firm at a fixed interest rate for a defined period of time.
Here are some of the similarities between stocks and bonds:
Classification– both are normally classified under the securities category. Both of them therefore form the capital market. Regulation- both stocks and bonds are regulated by the US Securities and Exchange Commission. On a closer scale, bonds and stocks can be easily understood by taking into account their basic differences. These include:
The Nature of the Investment– stocks are usually trading instruments in the market while bonds naturally fall under the “buy and hold” type.
Holding Period– stocks are normally held for shorter periods of time mostly a month or so in order to take advantage of the gains from the underlying stock while bonds are held for long periods of time up to 30 years.
Expiration– both stocks and bonds have a fixed expiration period. However, stock options have shorter lifespans of some few months ranging to a year while bonds expire after several years.
Risk– this is one area where most investors concentrate on. Of course all the investors want to have some positive returns at the end of the day. Bonds have a lower level of risk because of the fixed interest rate and they generally have lower returns at the end of the day. This is not the case with stocks which have a higher risk and therefore a higher level of return.
Experts also advise investors to consider their age bracket very wisely. The younger generation is advised to invest more in stocks because they are exploring many options, have fewer responsibilities and they can therefore stomach risks without much ado. This is basically not the case with old people above 30 who are very cautious for any losses because of the many life responsibilities and challenges they face. At the end of the day, risk and uncertainty may form the major determinants of the better of stocks and bonds.
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