What are Stocks & Bonds and Which one is Right for You

Alan Joseph Alan Joseph
Mar 17, 2021 5 min read
What are Stocks & Bonds and Which one is Right for You

Stocks and bonds should be a common term that everyone should know. But sadly, most of us don’t have adequate knowledge on what a stock or bond is. Here we can look at the meaning of stocks and bonds and even analyze which one is the best option for you as an individual.

What are Stocks
Benefits of Stocks
What are Bonds
Benefits of Bonds
Which one is Right for you
FAQ

What are Stocks

Stocks represents the ownership of a fraction of a corporation. Most of the time when a company requires extra capital, they list their company’s stocks on the stock market. In simple terms, they sell a part of the share of their company to the general public and in return, they would receive money.

When you buy a share of the company you become an owner of the company. The person who buys the shares of the company will be called an investor and the company which lists their stocks will be a Public limited company.

The companies will have to show their business activities every year to the general public. It will be available to each and every individual even if you don’t hold a share in the company.

There are two groups of people in the stock market. One group are investors who buy the shares of companies and hold them for years expecting the share prices to rise. The second group is traders - they buy and sell different shares of different companies in a short period of time mostly in a single day.


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Benefits of Stocks

Stocks are considered to be risky. But if invested wisely you would get unimaginable returns from it. Stocks are also called as equities. People consider stocks as one of the investment options. Stocks have proven to beat the inflation rates over the years and is a form of security that shows that you hold a piece of ownership in the company.

Certain companies even provide dividends to their stockholders. Dividends are part of the profits the company earns during the year. So, in addition to the increasing of the value of stocks, you would even receive a part of the company’s profits with it.

Bombay Stock Exchange
Bombay Stock Exchange

What are Bonds

Bonds are also a financial instrument. In simple terms, if the company or the government requires money, they issue bond certificates. Sometimes government would require some funds to develop a new road or come up with new infrastructure in the city or companies. The government would want to open new branches at that time so they would opt to raise funds through the issue of bonds.

When you buy a bond certificate you are lending money to the government or the companies. They will have to pay back the money they owe you plus the interest.

There are different types of bonds and there are agencies that rate the bond. The bond certificates with the highest rating will be the safest bond and vice versa.


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Benefits of Bonds

Bonds are less risky than shares. They provide higher returns compared to bank deposits. There are certain bonds that are tax-free or even charged less tax compared to other instruments. Bondholders will have more preference than shareholders in a company.

If the company is closing down, the bond holders will be paid first and then the shareholders will be paid. However, while buying a bond one should wisely choose it according to the credit ratings given to the bonds and a proper check about the company issuing the bonds.

Which one is Right for you

Stocks and bonds have their own advantages and disadvantages. Stocks are considered to be riskier than bonds. Whereas stocks can provide really high returns than bonds. If you are ready to take high risks you can invest in stocks but if you want comparatively lower risk then you can go for investing in bonds.

However, one cannot blindly invest in either stocks or bonds. Before you invest in stocks you will have to learn the basics of the stock market, fundamental and technical analysis. You should always do your own research before investing in stocks and never invest based on anyone else’s advice.

Even investing in bonds requires prior research. You will have to check the ratings and then invest in bonds. Certain investors invest in bonds and stock markets together to manage their risk. They will invest in proper ratios so that they will be able to get an average return from both instruments.

Choosing to invest in stocks or bonds can be according to your risk appetite.

FAQ

What are the 4 types of stocks?

Growth stocks, Yield stocks, IPOs, and Defensive stocks are the 4 types of Stocks.

What is the safest investment?

Certificates of deposit (CDs), money market accounts, municipal bonds and Treasury Inflation-Protected Securities (TIPS) are among the safest types of investments.

What stocks lost the most in 2020?

Occidental Petroleum Corp, (OXY) Coty (COTY), Marathon Oil Corp, (MRO) TechnipFMC (FTI), Carnival Corp. (CCL) stocks lost the most in 2020.

Conclusion

If you do not have the time to do the research of a company there are companies that invest on behalf of you. There will be fund managers who would invest your money on behalf of you and provide you with the returns. Those are called Mutual fund companies. Now there are apps like Groww, smallcase, Etc., which help you in investing in bonds and stocks.

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