It has been observed that although many people know ‘how to earn money’, very few are actually smart enough to invest their hard-earned money in order to maximize the profits. Investing money is an art which every individual should learn for his financial stability and progress. Investing money in bonds and stocks has been a popular trend over the years. Though the debate as to which is a more profitable form of investment continues, the fact is that both of these investments, stocks and bonds, can give good returns.
Which is a Better Investment?
Before we know whether bonds or stocks can give high returns in the future, let us understand the concept of issuing these investment options. When you buy bonds of a company or an institution, you actually give it a loan for its business expansion. In return, the organization will give you a fixed amount as an interest for your investment. This rate of interest is known as the coupon rate. However, when you buy stocks, which are the shares of a company, you become a part or in other words one of the owners of the company. More the number of shares held by you in the company, more will be your stake in the company.
Many investment experts believe that investing in bonds would be a good option for those who do not have a complete knowledge of the stock market. This is because when you buy them, you continue to get the interest even if the company does not post good financial results. Thus, your investment is safe. However, investing in bonds of good, well established, and reputed companies is a must. Before investing, you should judge the credit worthiness of the company, whose bonds you will be buying. See what the past track record of the company is like. You can buy bonds of both, government as well as private companies. It is believed that government bonds give good returns and are a safer investment option than those of private firms. However, there are certain private companies that have given great returns to investors for many years. The drawback of investing in bonds is that at times, you might not get your principal amount back. Also, you do not get the advantage of the increasing profits made by the company, as you are entitled only for a fixed amount of return.
On the other hand, buying stocks can help you get much more returns, as you become one of the owners of the company. The price of a share of a company depends directly on its performance. So, when the company performs well, your share prices will go up giving phenomenal returns on investment. As a shareholder, you will also get bonus shares and dividends, which will increase your profits to a great extent. However, if the company fails to perform, then the demand for the stock you hold will naturally decrease in the market, causing the share price to fall. This will result into a big loss of capital. Ideally, investment in blue chip stocks is recommended, as these companies have a sound business model, large number of clients, good sales and revenues, and history of giving handsome returns to investors. Investments in stocks are certainly meant for those who have a high risk taking ability.
It is important that you research well before investing money in stocks and bonds. This article should have helped you understand the vital differences between the two investment options.