Stocks and bonds are among the most known financial investment instruments. These are both securities, listed or unlisted, issued by companies to acquire liquidity to be used in the growth of the business. These are the only aspects that stocks and bonds share; as a matter of fact, all their other characteristics are very different.
From the relationship the investor establishes with the issuing company to the ways in which a profit can be made, right down to the level of risk, let’s find out what the main differences are.
Stocks: what they are and how they work
Shares are capital securities that allow the investor to obtain a share in the issuing company. In other words, whoever buys a share buys, to all intents and purposes, a small percentage of the company and becomes a shareholder, acquiring rights and obligations.
The profits generated by the company may, in some cases, be distributed among the various shareholders, who will periodically receive dividends; in other cases, these profits are used to grow the company. There are resources available on the web that allow investors to find out which are the best dividend stocks in the UK, and which may offer numerous tips for making an informed choice.
Those who hold shares can make a profit not only from dividends, but also from selling the securities on the secondary market. This is only possible if the company has been able to grow and promote an increase in the value of the shares; otherwise, i.e., if there has been a decline and the securities may have lost value, this could lead to a loss of the invested capital.
As a matter of fact, investing in stocks and shares is generally considered to be high risk and it is mainly chosen by those who wish to commit their capital for long periods of time.
What bonds are
Bonds are debt securities that, once purchased, make the investor creditor of the issuing company. The latter in turn becomes a debtor and undertakes to repay, on the maturity date of the security, the principal received on credit.
Bonds can be issued by both companies and States to have money available to invest in growth. In the UK, for example, there are gilts, i.e., bonds that are considered low-risk and that allow accrued interest to be earned through periodic coupons.
Bonds have variable maturities, which can range from a few months to several tens of years. The investor is, of course, not obliged to hold the bonds until the maturity date; if the investor deems it fit, he or she may sell the bonds on the secondary market, earning a profit if the value goes up, or losing part of the initial capital if the value goes down.
Because of their variable duration, bonds are used by investors looking for a long-term investment as well as those wishing to focus on short or medium-term investments.
Factors to consider
Those who are considering stocks or bonds, should carefully pay attention to some factors. As a matter of fact, one’s investment profile – which includes the budget, the level of risk one is willing to take, the goals and the time span one can bear – and the characteristics of both the financial instruments in general and those of the chosen security should be taken into account.
Since making an informed choice is far from simple, as many skills are required, and the risks are numerous, it is always advisable to be supported in the choice and creation of an investment portfolio by expert professionals.
