What’s the Difference Between Stocks and Bonds?
In 2021, Gallup reported that 56% of Americans owned stock. That figure has remained stable over the last few years; before the last recession—that is, pre-2008—it sat at 62%.
If you’re new to the investment scene, the first thing you need to know is the difference between stocks and bonds. The article below gives you a brief synopsis of the crucial differences between these two types of investment opportunities.
There Are Different Investment Instruments
Do you use an iPhone? Well, you could also own a piece of Apple, the company that makes iPhones, by investing in their stocks. Stocks are essentially an equity instrument that allows a person to carry ownership interest in a publicly listed company.
Stock prices vary from day to day. And that’s a great thing for your investment portfolio because if a company is performing well, its stock prices go up, and so do the returns on your investment.
This is the primary reason most people prefer to invest in “blue-chip” companies—those that have been around for a long time and keep growing year on year.
Bonds, on the other hand, are a debt instrument. They come with a promise to pay back the money (to you) with interest.
So, for example, when you buy US government bonds, you’re essentially lending money to the US government. In return, the US government promises to pay back your loan amount plus some interest.
Most of the world’s governments offer bonds, so if you’re interested in investing in a particular country, bonds are an easy way to do so. For example, have a look to see how Israeli bonds work.
If you’re a low-risk investor who doesn’t like the ups and downs of the stock market, investing in bonds could be an attractive alternative to stocks. The returns aren’t as lucrative, but they are guaranteed.
The Return Is Different, Too
As mentioned above, stocks offer a return on your investment in the form of increased stock prices. But some companies also sweeten the deal by providing quarterly dividends to their stockholders.
Stock returns can vary widely depending on how well the economy is doing and many other factors. Returns are not guaranteed. If there is a recession or the market does poorly for some other reason (for example, pandemics or natural disasters), your returns could be zero or even in the negative.
Bonds offer returns only in the form of interest, and this interest is already set from the get-go. In other words, it’s guaranteed. Bonds are a reliable option if you like knowing exactly how much you’ll receive from your investment.
A Clear Difference Between Stocks and Bonds
Even a newbie at the investment game can easily understand the difference between stocks and bonds. Once you’ve defined your risk tolerance levels, it’ll be easy enough to figure out how much money you want to invest into either or both of these two investment instruments.
Check out the related articles on our website for more ways to invest your hard-earned cash.