There are various advantages of buying stocks instead of bonds, when we talk about advantages there are many disadvantages too which will help you to know the difference between buying stocks over bonds. Understanding the difference between them is the key that makes the right choice of the portfolio.
Well! Before going towards the pros and cons of putting the money in various types of stock, let me tell you about some facts about in general:
- Risk Bearing, money investing in stocks is money at risk.
- Stock can be traded sideways for a long time.
- Time taking, you never know what exactly will happen.
- Stocks fluctuate and go up and down
There is a difference between stocks and bonds which differ dramatically in payouts and returns, and to be honest we usually care about returns, stocks are considered as a part of ownership, they represent about the decision making and participation in the company’s growth. Therefore, we never know what will be the returns of the investment that we made. As we all know that the profitability of the investment depends on the fluctuation in stock price, which is moreover related to the performance and growth of the company.
Bond is said to be a form of debt where you are a lender instead of a borrower. Bonds are the contractual loan which are made between investors and institutions, and for the return for financing, the premium is to be paid which is known by the name of Coupon.
You must be thinking, whether stocks are good or bonds, but the answer is none of them because they both have their own pros and cons.
Pros of Buying Stocks instead of bonds
Stocks as compared to bonds have a higher potential for generating returns, investors who are willing to have greater risk as compared to the bondholders who prefer the benefit of having partial ownership in the company and the rising of stock price can say to be better in investing in stocks.
Buying stocks can benefit you as they are easy to buy, many investors buy the stock at a lesser price and sell them on high. They invest in fast-growing companies where value is appreciated. Therefore, the stock market allows you to sell the stock anytime.
Cons of Buying Stocks instead of bonds
We are aware of the fact that stocks are said to be risker as compared to the bonds. The reliable return for bonds depends upon the coupon payments. The possibility of higher return is greater with stocks and also the possibility of losing money is higher in stocks as compared to the bonds. The person who is not good at bear risk is advised to go for bonds rather than stock. Bonds to have risks but lesser than the stocks, the risk in bonds are liquidity risk, event risk, exchange rate risk, credit risk, inflation risk, etc. The major disadvantage is bondholder can lose all their money if the company becomes bankrupt.