How to Compare Stocks & Bonds
Stocks and bonds are two different asset classes that have many differences. However, these investment instruments have key points to compare to determine whether or not either would make a suitable investment.
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Time Frame
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Time horizon, or how long you are looking to hold an investment, is very important. You need to determine how long you plan on holding a particular investment. Stocks can be owned indefinitely, but bonds have a maturity date---an expiration date. Once maturity is reached, the bond is paid out to the investor, and the investment is closed. A bond's maturity can vary, beginning with 7 years and going up from there. Compare the bond's maturity, which is predetermined with the bond, and how long you want to invest in a stock.
Yield
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Bonds and most stocks offer a yield, which is a payout represented as a percentage. This can be compared by researching each investment, which can be done on the bond issuer's or company's website. Yields are a primary reason investors choose one security over another. For instance, a 10-year bond may offer a 1.5 percent yield as opposed to a stock's 3.4 percent yield. Be aware that a company can lower a yield whereas a bond's yield is locked in.
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Security
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Compare the security of each asset. Bonds are considered a safer investment than stocks. However, this security risk depends on the bond issuer. Government and municipal bonds are safer than corporate bonds due to the low risk of default. However, bonds can be defaulted on by companies or affected by interest rate increases. Conversely, stocks are volatile and fluctuate in value. You would need to compare the risk of the stock market over risks that affect bonds, such as default risk, credit risk or interest-rate risk.
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References
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Comments
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good view but there should be also an issue of how prompt you expect the payout.
