What are
Stock & Bonds?
What Are Bonds?
Bonds are a common investment, and yet it remains a mystery to investors. At its core, a bond is a loan given to a company or government by an investor. The company or government has to pay interest on the money they loaned for funding new projects or ongoing expenses. Some investors use bonds to generate additional income while maintaining their initial capital. Bonds can be considered a low-risk investment and plays a role in diversifying a portfolio. Bonds are considered beneficial when both the borrower and loaner benefits: borrower finishing a project and loaner getting his money back with additional money from the interest. As bonds offer regularly scheduled payments and return of the original investment at maturity, it is considered as a predictable and a stable form of investment. Stocks fluctuate more often than bonds as it is dependent on the volatile market forces.
However, bonds certainly come with risks. Bonds have a default risk, which occurs when the borrower does not decide to give the money back. The risk of the bond is dependent on the financial stability of the borrower. Moreover, there are credit-rating agencies that measure the financial strength of the borrower. There is also interest risk in bonds. Interest risks occur when interest rates go up. As a result, the value of your bonds will decrease especially when it is sold before the maturity date. Despite these risks, bonds are still generally safer than stocks and helps investors create a well-balanced investment plan.
What Are Stocks?
Stocks are shares in the ownership and a reflection of performance of a company. Stocks allow investors and people to own a small fractional part of a company. Moreover, stocks are like a performance chart for the company because stocks usually increase when the company is doing well and go down when the company is performing poorly.
However, there is a point to keep in mind. Stocks are not only a representation for performance, but sometimes showcase rumors and stories. As a result, when a company’s performance spreads between people, their stock will mostly correspond to the rumors.
Additionally, stocks are traded in the stock market, where investors and people can buy or sell stocks based on their perception of a certain company’s current performance, possibly making or losing money.