How to Choose Between Stocks and Bonds

How Bonds and Stocks Differ

New investors often struggle to understand the difference between stocks and bonds. The ideal investment for you is not the same for your neighbor. Understand the difference between stocks and bonds and make the best investment choice for you and your money.

Instructions

1. HOW STOCKS WORK. When you purchase stock in a company, you purchase rights to a percentage of the company's earnings. While the percentage is determined by the quantity of stock you purchase, the money you make on the investment is determined by the speculation and the success of the company. There is no limit to the amount of money you can make investing in stocks, but the likelihood of losing money is substantial.

2. HOW BONDS WORK. Bonds can be understood as loans you make to a company. You and the company agree upon an interest rate and the company repays the loan, with interest, over time. Bonds have limited earning potential because their long term value is known at the time of purchase.

3. STOCKS AND BONDS AND PROMISES. While there are no guarantees when it comes to investing, the likelihood that you will get a return on your investment differs dramatically between stocks and bonds. Bonds investments, essentially a loan to a business, can be expected to be paid back with interest by the issuing company except in cases of extreme financial hardship, like bankruptcy. Stocks, on the other hand, are more like playing the lottery. Stock investments may or may not be returned depending upon the success of the business you are investing in. You may experience a loss in Stock investment even if the company is not filing bankruptcy. A stock's value is based largely on speculation, making it vulnerable to depreciation of value. Bonds, however, are do not rely on market trends to dictate value.

4. JACKPOT OR NEST EGG. If you're looking for big rewards on your investment, you're not likely to hit the jackpot with Bonds. When you invest in Bonds, you do so knowing the maximum payout your investment can generate. Stocks, on the other hand, have infinite earning potential and your profits will grow along with the success (or perceived success) of the company issuing the stock.

5. STOCKS, BONDS, AND ELBOW GREASE. Another big difference between stocks and bonds is the amount of work required on your part. Once a bond is purchased, the investor can simply relax and wait for their money to return. By contrast, stocks are active investments and require monitoring. Successful stock investors spend a lot of time and energy watching the market for trends and buying and selling stocks.

6. STOCKS, BONDS, and EXPENSES. You may benefit from professional financial advice when initially purchasing a bond, but once you have invested there is no going back. Stocks, however, require similar financial advice, but you can expect to continue paying for advice and transaction fees throughout your investing career.

Tips & Warnings

• This article is not intended to provide financial advice. For help in financial decisions, seek the advice of a professional financial adviser or attorney.