STOCKS AND BONDS

It is time to get your money invested. How exactly will this money be allocated? After all, before you start purchasing assets such as stocks and bonds, a well-diversified portfolio approach is suggested. In reality, stocks and bonds are two of the most traded types of capital, each available on a variety of platforms or through a variety of brokers or markets.

The difference between stocks and bonds is that stocks are securities of a business's ownership, while bonds are a form of debt that the issuing entity agrees to repay at some future point. To ensure a proper capital structure for a business, a balance must be struck between the two types of funding. In particular, here are the main differences between the stocks and the bonds:

Key Differences

• One important difference between the bond and stock markets is that the stock market has central places or exchanges for the purchase and selling of stocks.
• Another key difference between the stock market and the bond market is the cost of investing in each. As far as stocks are concerned, investors may be exposed to such risks as country or geo-political risk (whether or not they are a business), currency risk, liquidity risks or even interest-rate risks which may affect the indebtedness of an undertaking, cash in its hands and its bottom line.
• On the other hand, bonds are more likely to be vulnerable to threats like inflation and interest rates. Bond prices tend to decline as interest rates increase. You will end up paying lower rates if you have high interest rates and have to sell your bond before it matures. You open yourself up to the credit risk when you buy a bond from an organisation which is not financially sound. In such a case, the debt issuer cannot pay interest, so it is available for default meaning you don’t receive the anticipated return on investment.

The stock and bond concepts are both distinct, with some features in common. Some bonds in particular are transformed to allow bondholders to convert their bonds to corporate stock at predetermined inventory-to-bond ratios. It becomes useful as the stock price of a company rises, enabling bondholders to make an immediate capital gain.