Differences Between Stocks And Bonds

If you want to invest in the stock market you have two options. You can either invest in stocks or bonds. Ideally, you would invest in both as it is a good policy to keep as varied an investment portfolio as possible.

Companies regularly release both stocks and bonds as a means of raising funds to pay for expansion. But stocks and bonds operate quite differently. Bonds are only allowed to be released by firms as a means of paying for their operations in the short term.

Bonds are issued with a specific period only. These short term investments raise money for the firm for a time, but when their period expires the bonds must be repaid to investors, usually with interest, using the money that the firms have made using the capital raised by the sale of the bonds.

Stocks are released only when the value of a complete firm is calculated. This total value is then split up into equal shares. These stocks can then be issued for sale on the stock market, allowing firms to raise capital. Unlike bonds, the firms are not required to repay any of the revenue raised by the sale of stocks.

Corporate bonds are those issued by private sector companies, and are always issued in the short term only. Government bonds are those released by local and national governments. Government bonds can be of a longer term than corporate bonds, with some government bonds spanning a period of as much as 30 years.

Stocks generally exist for longer periods, typically for as long as the company selling the stocks is in existence. Companies can however buy back stocks, making themselves private companies again rather than public companies, but this is rare.

There is a certain level of risk attached to both stocks and bonds, and this risk level is reflected in their pricing. The credit rating of a firm, which is directly related to the ability of that firm to pay its debts, has a bearing on the price of both stocks and bonds.

Bonds that are issued by companies who have riskier credit ratings tend to offer an increased interest rate, and hence bigger potential profit, to investors in exchange for their investment in a riskier company. Because it is rare for companies to default on their bond repayments, both corporate and government stocks are seen as a safer and more stable stock market investment.

By: Renato Loehrer

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Renato Loehrer is very knowledgeable on savings and accounts and loves to write about corporate bonds.