There are some similarities between stocks and bonds. Both of them allow businesses to secure funding for their operations and both provide investors a way to invest into a business to gain some returns of their investments.
So the huge difference between the two is the agreement that’s sealed between the bondholder and bond issuer versus the deal between a stockholder and a stock issuer as well as the amounts the stock or bonds will pay out.
Stocks make you part-owner of a company.
Being a stock owner means that you have nothing guaranteed. The idea is that you’ll get returns when the stock you bought appreciates in value and, in some instances, pay dividends.
On the other hand, you’re not very sure about this in terms of the stock market. The price of stocks or shares can fluctuate quickly, moving up or down regardless of how the company itself is performing.
In exchange for the additional risk and volatility of the stock, equities usually have much higher ROI potential than even higher yielding corporate bonds.
Bonds make you a creditor of the company.
While a stockholder ensures nothing, owning a bond entitles the investor to interest payments (not including zero coupon bonds) as a creditor on their bond purchase as well as the promise that the bond will eventually be repaid at 100 percent, as long as the company goes bankrupt.
Investments in high yield corporate bonds are considered less risky because of less volatility when compared to stock investments. Therefore, even if stock can offer higher ROI in the longer haul, they are not as stable and do not guarantee a fixed interest payment as dependable income.
No corporate bond is completely safe.
Although corporate bonds are considered less risky than a stock, there really no guarantee that you will get your money back. That means you can still lose your principal.
Investors must perform their due diligence to evaluate corporate bonds just as they would to stocks to protect themselves from the chance of default.
Bonds will never whip out stellar growth in a short time.
The primary reason some investors choose stocks over bonds is the huge potential for ROI. A corporate bond has a capped amount of returns, so even if you are a bondholder for a small company that hits it big, your ROI will not go up accordingly.
In addition, this severely limits the scope of a bond’s ability as an asset class to make up for individual losses by outweighing them with larger gains elsewhere the way stocks can.
Corporate bonds aren’t easily appraised as stocks are.
Investing in a corporate bond only makes sense when you can know how likely it is that the company issuing it will truly make the interest payments without going bankrupt.
That means you have to have an in-depth stream of financial information. It also means you have to know what you are likely to get back if the company does go belly up.
