stocks versus bonds
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Financial Literacy - March 30, 2022

Stocks Versus Bonds, What You Need to Know

The question of whether it is preferable to invest in stocks versus bonds is an age-old financial debate that is frequently on the minds of investors at various stages of their careers.

When it comes to investing, stocks and bonds are sometimes grouped together, although their risks, returns, and behaviours are vastly different.

Stocks reflect a company’s ownership position, while bonds are debt instruments. Companies can fund and expand their business in these two ways.

Stocks and bonds both have a role in a well-balanced investment portfolio. 

Knowing how they function may help you make better investment decisions to help you achieve your long-term financial goals.

Stocks and bonds are two popular investing options. They are accessible for purchase on a range of platforms and through various marketplaces and brokers. And there are some key distinctions when stocks versus bonds.

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Stocks versus bonds

What are stocks and bonds? 

Stocks represent part ownership of a company’s equity. When you buy stock, you’re essentially buying a small piece of the company, called a “share.”

And the more shares you acquire, the more ownership you have in the company. Let’s imagine you invest $2,500 in a firm with a stock price of $50 per share, and you buy 50 shares for $50 each.

Consider a scenario in which the company continuously performs well over a long period of time because you own a portion of the firm. Its success is also your success, and the value of your shares will rise in lockstep with the company’s worth. 

If the stock price rises to $75 (a 50% increase), the value of your investment will grow to $3,750.

A bond is a loan from an investor to a borrower, which is usually a company or even the government. 

When you buy a bond, a company or the government enters into debt with you, and it will pay you interest on the loan for a certain length of time before repaying the whole amount you paid for the bond. 

Bonds aren’t fully risk-free. If the company goes bankrupt during the bond’s term, you will no longer get interest payments and may not receive your entire investment back. 

Let’s imagine you spend $2,500 on a bond that pays 2% annual interest for ten years. 

That implies you’d get $50 in interest payments every year, usually spread out equally throughout the year. 

After ten years, you will have earned $500 in interest and recouped your $2,500 initial investment. 

Participants in stocks and bonds 

In stocks, the participants involved range from broker-dealers, transfer agents, ATS and investment advisers.

Bonds have issuers, mostly companies or different levels of government, help to develop, register, and sell instruments on the bond market. For example, Debt Management Office Nigeria.

There are also underwriters that assess risk and buy securities from issuers and resell them for a profit.

Participants are entities that buy and sell bonds and other financial instruments.

Terms in stocks and bonds 

Stocks 

Annual report  

Annual reports provide information about the company to shareholders. It contains data about the company’s cash flow and management strategy.

When you read an annual report, you’re evaluating the company’s financial health and solvency.

A bear market: A bear market is defined as a market condition in which a major index or stock has fallen 20% or more from recent highs. A bear market is the polar opposite of a bull market. 

A bull market: The polar opposite of a bear market is a bull market. It refers to a market that has increased stock values by at least 20% from a recent low over a long period of time.

Bonds

New issue: A new issue occurs when a corporation raises funds through the sale of bonds. 

Bonds worth millions of dollars are frequently available in a new issue. The face value of each bond usually is $1000. The face value of a bond is the cost of purchasing one.

Coupon: A coupon is the amount of interest paid on a bond. A new bond, for example, might pay a $50 annual coupon. 

Investors should expect $25 every six months because coupons are normally paid twice a year. 

So, a bond with a $50 coupon and a $1,000 face value has a 5% coupon rate, which equals the interest rate on the loan.

Maturity: The term “maturity” refers to the duration of a loan. When a loan matures, the principal is repaid to the borrower. It usually lasts between 1 and 30 years.

Duration

Stocks  

The duration of a stock is not predetermined. The stock price and dividend are tangible and taken straight from the market. 

Bonds

Commercial paper or bills are short-term loan investments that last less than a year. Notes are bonds with maturities ranging from one to ten years. Bonds with maturities of 10 to 30 years are simply bonds.

Despite having a 30-year maturity, some bonds can be paid off early. 

Callable bonds are what they’re called. The term “callable” refers to a bond issuer’s ability to return the invested principal to the investor after a short period of time, thus paying off a loan early. 

After the investor’s original principle has been repaid, the investor will keep all interest paid up to that time, but no more coupon payments will be expected.

Stocks versus bonds, which is secured? 

Stocks are highly volatile and measure how much the market’s overall value changes up and down.  

Some bonds are secured, while others are unsecured, and they offer different levels of protection. 

Credit ratings for some issuers differ. Some have different interest rate structures and repayment timelines than others.      

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