In this article, we have done a comparison between company stocks and bonds to get you a clear picture of the differences.
Market participants and analysts can tell you numbers of differences between stocks and bonds. We have mentioned the most important differences between these two from an investing point of view.
Ownership – Stock better than bonds
Common stockholders are treated as owners of the company having voting rights and claim on income and assets. In case of liquidation common stockholders stand last in line in their right to share in the income and assets.
When a company files for bankruptcy, shareholders will get if anything is left out after paying everyone including the debt holders.
Which means, in case of liquidation and bankruptcy, common stockholders will always stand last in line.
Bond holders are debt holders or creditors of the company. Investors in bonds will get a steady interest income irrespective of company’s profitability.
Regular Income – Bonds are better in short-term
In case of dividend, stockholders are getting paid after the bond holders are paid their interest. Dividend is also not guaranteed. It’s the discretionary power of the company whether or not to pay a dividend.
Stock of almost all small companies do not even pay dividends.
However in the case of bond, it offers a steady stream of income.
Rates of return – Stock is better in long term
Investors are attracted to stocks for their ability of getting good returns over a long period of time.
People invest in bonds primarily for getting periodical income irrespective of company’s profit.
Historically, over long periods of time, stock has always outperformed bonds and all other investments.
Variability – Bonds are better
Stock prices go up and down every trading day based on so many factors. Variability of stock can be averaged over a long term period resulting in higher returns for investors.
Due to higher volatility of stocks, few investors prefer not to invest 100% of their total fund into stock. They prefer diversification based on their goal and risk appetite.
When stocks are excessively valued, investors prefer to sell their holdings in the stock market and put them in bonds to get a good return. After market value gets corrected up to their expectation, they sell their bonds to get back to stock.
Investors with a short term horizon, might go for bonds to protect themselves from the possibility of downturns in the stock market.
Investors with a long term horizon can invest in stocks. If you want growth in your wealth, then prefer to go for value stocks and growth stocks. In case of regular dividends, try investing in income stocks. If you are risk averse, then can go for growth stocks.
Risk-averse investors with a shorter time horizon can go for bonds.
