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Buying stocks vs bonds

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Publish Date: December 05th, 2019

By: Sandhya Kannan, Head – Content

When investing the surplus funds or savings, most people vacillate between buying either stocks or buying bonds. The distinction between stocks and bonds is clearly defined. All you have to do as an investor is to educate yourself about the difference between the two. You also must decide your priorities when it comes to investing.

What is the difference?

When you invest in stocks you are choosing to become a part-owner of the company – in whichever minuscule way that the share entitles you to. Purchasing stocks make you a part of the company and the potential for gains and losses are dependent on the company's performance.

When you purchase bonds, you become a lender to the company. The company has essentially taken a loan from you, which will be paid back with interest at a pre-determined future date.

What can be expected?

Evaluate your own financial needs. If you are willing to take on more risk for potentially high returns, then you should buy stocks. The stock market has traditionally always given a higher return on bonds – averaging 10% on a diversified portfolio. But this investment also carries an inherent risk – the risk of losing your capital money, which has been invested – if the stocks do not do well.

Additionally, stocks go through periods of highs and lows. So investing in stocks is better suited for slightly long term investments. Stock market investments may pay off handsomely if the price of the stock goes high. Dividend payouts give a source of regular income, but neither of them assures returns.

If you feel you would rather be assured about the sum invested at the cost of earning less money thereon, then bonds are a safer bet. You would receive a fixed rate of interest and a predetermined payback date. It is a safe investment to make with little or no risk to the capital invested.

This should help you to decide whether you want to invest in stock or bonds. Identify your investing style and comfort level with risk before you make the decision.