The most obvious difference between stocks and bonds are that – stocks enable the investor to own a part of the company, while the bonds are nothing but loans that the investors provide to the company. Stockholders would benefit or lose as per the fate of the company, but investors in bonds will get a fixed rate of return; this would be a percentage that would be the original offering price on the bond, known as the coupon rate. Moreover, bonds have a maturity date after which the principal amount is returned. These maturity dates could go as long as thirty years for maturity.
There are credit ratings to determine how the companies stand in respect of paying back the principal amounts of the bonds. Standard and Poor & Moody’s Investor Service are two such institutions that provide credit ratings to the banks. Credit ratings are given on a scale of AAA to D. Companies with higher credit ratings are safer investments, but then they would give a lower coupon rate.
Among foreign bonds, the bonds of US companies are considered to be the safest type. Companies with long-standing performance records are called as the blue chip corporations. These also are very safe bond investments. The companies that are small corporations are the common defaulters of principals on their bonds. However if the company does go bankrupt, the bondholders are on the priority list to get compensated.
Buying and selling of bonds is done on the open market. The value of the bonds would fluctuate depending on the level of the interest rates in the general economy. Consider this: suppose a bond of $1000 pays 5% a year in interest. Then this bond can be sold at a higher face value if the interest rate is kept below 5%. If the interest rates rise above 5%, then the bond can be sold; but at a lower price than the face value. Consequently, the investors can get better interest rates that what the bond pays.
Bonds are generally traded in the over-the-counter market set up by banks and security firms. The stock exchange is also used for trading, which enable stockbrokers to sell bonds. New bonds are mostly sold in increments of $5,000 while bonds bought and sold after initial issues are done in increments of $100. A bond that is listed at 96 is selling for $96 per $100 face value.
This could clear the air about whether to invest in stocks or in bonds. A careful investigation must be done by the investor as to the risks and the potentials involved. Stocks can increase faster, but then they can also decrease as fast. Investment grade bonds with a rating of BBB or better are quite safe, but they provide smaller benefits.
Hence, if you are looking for a short term investment, then the bonds will give you better security and return. If the investment is being planned for more than ten years, then the stock market is much better in returns. Companies would increase in their worth over such significant periods of time and short-term fluctuations would be taken care of.
Most portfolios still figure bonds prominently in them. This shows that they are considered to be safe investments and as a buffer to the stock market fluctuation. Wise investors would blend bonds and stocks from various industries together to achieve maximum profits, and also for security of investments.
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