Stocks and bonds are those ladies who never miss a party – we have talked about them in several articles in this blog. So, what is the difference between stocks and bonds?

They are both considered the two main investment classes investors look for.

Companies need a lot of money to start and also to stay active and running. To get this money, they borrow cash and even sell their shares to investors.

To start telling stocks and bonds apart, we should take a look at the big picture. Check the chart below:

Debt

Equities

  • The company borrows money from others, such as financial institutions.

  • Securities = Bonds

  • Bonds certificates

  • The company sells parts of itself (securities) to investors, that become partial owners.

  • Securities = Stocks

Both stocks and bonds are securities and can be traded.

What are stocks?

Stocks raise money to a company through the distribution of shares.

They are traded on stock exchanges in the stock market.

What is the Stock market?

The market is where traders and investors go to trade equity securities, that can be regular stocks or derivatives (options or futures).

It has a centralized exchange or trading system, where stocks can easily be bought and sold. It is the broker we all use.

Who sells stocks?

Typically, stocks are issued by regular companies and corporations who want to raise funds without having to lend all the needed money.

What are the different types of stocks?

Stocks can fall under two main categories, the common stocks and the preferred stocks. As the name suggests, the common stocks are the ones people buy and sell the most.

You can choose to trade stocks by size – or market capital -, sector, potential growth, and region.

However, I always recommend that the ladies invest in a way their portfolio is diversified – so don’t pick just one of these stock types.

If you are feeling overwhelmed and want to study the sectors, the companies and the market first, you can always start buying Index funds.

If you put your money in the NASDAQ-100 index fund, for example, someone else will distribute your money evenly between all the stocks within the fund.

Top Articles On How The Stock Market Works:

What are bonds?

Bonds raise money to a company in the form of debt – as we’ve seen before. This security implies that the issuer owner owes a debt its holders.

The profit for the holders comes in the form of interest + the principal amount lent.

What is the bond market?

Stocks and bonds have a different type of exchange.

The bond market is known as the debt or credit market, and it usually is less risky in the case of bonds such as the government bonds.

Bonds are mainly sold over the counter (OTC), which means they don’t have a specific, centralised location to be traded.

Typically, individual investors like us trade bonds through bond funds with an asset manager.

Who borrows?

Bonds are issued by some corporations, public-sector authorities, credit institutions, and supranational institutions.

What are the different types of bonds?

There are mainly four types of bonds for you to choose from.

They are normally fantastic investment options for retirement and saving to buy a house, for the kid’s college, or to take a trip around the world when you’re older.

  1. Government bonds – Is when you are loaning your money to a government that will pay you back in full over time, with interests. This is an extremely safe type of investment – so if you are still afraid to trade, just start buying government bonds in your country, such as treasury bonds! They normally have different maturities for you to choose, and you can even buy funds from different countries.
  2. Municipal bonds – Many countries around the world issue local municipal funds. These are an investment option like the government bonds but, as the name suggests, you’ll lend money to towns, cities, and even states of a given country.
  3. Corporate bonds – If you believe a corporation to be potentially successful in the future and worthy of your credit, you can lend money to them to help them grow and pay you back with interests. Corporate bonds may be riskier, but the return is higher!
  4. Zero-coupon bonds – While the other bonds normally pay the interests periodically, the zero-coupon bonds are sold with a discount and come with a fixed interest rate that pays out upon bond maturity. The interests are accrued and you’ll earn a lot more in the long run.

Stocks versus Bonds

Those holding bonds have lent an amount of money to a particular company, and, as long as the company doesn’t go bankrupt, it will pay back the money it has borrowed from its lenders.

Those holding stocks own shares of the equity, as opposed to the debt. If you hold a stock, you are a partial owner of the company, so there are no limits on how much you can earn. You can also go bankrupt in case the company goes bankrupt, though.

Let’s see an example of the company SASSY, worth £10 million in assets:

Bonds

Stocks

  • SASSY has £6 million in bonds = it owes £6 million to people or financial institutions

  • The £6 million in bonds are divided into 6,000 bond certificates.

  • Each bond certificate has a face value of £1,000 + interests.

  • Anyone with a bond certificate of SASSY will be payed £1,000 + interests at maturity.

  • SASSY has £4 million in stocks = it sold 4£ million in shares to its owners

  • The £4 million of equities are normally divided into a large number, which is the number of shares the owners have.

  • SASSY has 10 million shares = the equity is should be divided by 10 million. Each share would be worth £0.4.

When a company goes bankrupt, normally the owners sell them for a lower price.

In the case of SASSY, whoever lent money to SASSY would be payed first, and then the stock owners would divide the rest.

This is the benefit of trading with bonds – you’ll have preferential treatment when the maturity period arrives.

Summing up Stocks compared to bonds

Now we’ve covered the difference between stocks and bonds – what fits best with your trading strategy? While both are amazing investment options, bonds and stocks are very different in the aspects discussed. 

Diversify your portfolio by lending money to companies and by buying their shares as well.

Do not stick to one investment type, I’m sure you have many objectives for the long term, right?

Tell us below, what is your favourite: stocks or bonds?

Let us know where you are investing your precious money and on which companies you trust!

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