Should You Choose Stocks Or Bonds?

The difference between stocks and bonds isn't clear to those just starting in the wonderful world of investing. While stocks give investors part ownership of a company, bonds are loans made by investors to corporations or governments. Rather than benefiting from company profits the way that stock holders do, bond holders receive a fixed rate of return, a fixed interest rate. Bonds only last for so long and have a termination date called the date of maturity. Also, they can take decades to mature, whereas stock exchanges happen with lightning speed every day. If you are just looking to make a quick buck with high risk, go for stocks. In comparison, if you need stability, say, for a retirement, you might choose bonds.

1. Risks Versus Rewards

As hinted at earlier, stocks have a higher rate of risk whereas bonds are more secure. Of course to say bonds are safer than stocks doesn't automatically mean that you will always make money on bonds. A bond is an investment - and as such it may not be paid back. US government bonds are considered to be the safest type of bonds. Blue chip corporations (those with established performance records that span over many decades) are also very safe bond investments. Smaller corporations have a greater risk of defaulting on their bonds, but if the business goes bankrupt bond-holders are preferential creditors and will get compensated first.

2. Trading Bonds

Traditionally, bonds were the exclusive trading realm of huge corporations and banks. Not any more - even a savvy investor can begin trading bonds with as little as $5,000. Bonds bought and sold after the initial issues are quoted in increments of $100. A bond that is listed at 96 is selling for $96 per $100 face value.

3. Stocks Or Bonds?

Given what you have read so far, you might think that stocks are better for the short term and bonds for the long term, but the statistics do not lie. Bonds offer greater security and return on your investment than stocks, overall. The situation changes, however, when time spans of longer than 10 years are considered. The stock market has consistently outperformed bond investments by a large factor. This is because companies continue to increase in value and any short term fluctuations in the stock market become smoothed out. Overall, you should never put all your eggs in one basket - consider a bond as part of your portfolio to help cushion against market fluctuations. A mixture of investments is always the best choice.

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