Stocks and bonds main differences
The issue of profitable investment of personal capital is still relevant for many. The common phrase that investments are a direct and sure way to enrichment is not unfounded. People who have doctorates in economics and are simply knowledgeable in this area argue that it is necessary to distribute an investment portfolio with the inclusion of diverse liquid securities, the well-knownness of which traditionally forms the basis of the stock market - stocks and bonds. Some ordinary people do not understand the fundamental difference, but a person who positions himself as a private investor is simply obliged to understand the differences and preferential preferences of each security.
The presented material of this topic will help everyone to improve the level of financial literacy. After all, most people have not advanced beyond the primitive manipulations of reselling foreign currency and, of course, consider the stock and bond market to be a gray scheme similar to roulette. We will try to refute such petty-bourgeois notions. So, what is commonly meant by the classification of securities called shares.
For those who like to watch and listen, we suggest watching a short video about what stocks are and their main differences from bonds. For more information, read the continuation of the article below the video.
What is hidden under the term action?
A share in finance is a security that secures the rights of the holder (owner), which allows you to claim a certain percentage of dividends. Shareholders of the community, referred to as shareholders, have the right to claim its assets in the event of liquidation. With an increase in the volume of these securities, the percentage share of the holder grows accordingly and proportionately. Figuratively speaking, the shareholder has a part of the profits, but the question will be legitimate: “Why should companies share or distribute profits that belong entirely to them?”. The answer is prosaic and simple. Any business will certainly require additional investment - this is almost an axiom. Of course, the possibility of lending by a bank is not excluded, but this automatically translates the company into a borrower, which entails certain inconveniences.
It is much easier to raise and form third-party capital by selling part of the company through shares. In fact, the owners of shares acquire them, relying on the future prosperity of the company and the growth in the cost of securities issued by it. If the joint-stock company is designated as closed, then the investment of such an enterprise by the “first comer” is not possible, due to the absence of open imitation of shares on the stock exchanges, distribution is carried out only among the founders.
On the contrary, the shares of an open joint-stock company, having passed a certain listing procedure, are available through the stock markets. Everyone who wishes to acquire such shares inherits the opportunity to become a full-fledged co-owner of the company, giving him the right to participate and vote at shareholder meetings, while the liability imposed is limited to the amount of sole investments. There is a well-established stereotype that says that for one hundred percent success in investing in stocks, special knowledge and extensive training are inevitably required.
This clearly does not correspond to todays reality, it is enough to learn the basic immutable rule - real income is due not so much to playing with securities as to owning them. One can argue endlessly proving the opposite, but the experience of private investors who have successfully realized their potential indicates that this is indeed the case. It is enough far-sighted to make an investment portfolio of 15-20 leading, liquid stocks related to various sectors related to the economy: finance, industrial and leading consumer goods, medicine. In the future, it will only be necessary to balance assets quarterly.
The shares themselves are divided into two types:
- Ordinary, designated as equity securities with the potential right to claim the resulting net income, calculated in dividends, the percentage of which is directly dependent on the financial health and success of the company, as well as the resolutions of the board of founders. In addition to the above, an ordinary share gives the owner the right to vote, the weight of which is tied to the numerical ratio, figuratively speaking, more shares - a more powerful and convincing voice.
- Preferred stock is comparable to some intermediate form between a stock bond and a standard common stock. It gives the owner the primary prerogative for dividends, as well as deductions upon termination of activity (simply liquidation) of the enterprise. In this variety, the shares are regulated and guarantee a fixed percentage profit, which is quite appropriate even with a loss-making period of the enterprise.
Comparative analysis unbiasedly shows that common stocks are more risky, but provide definitely more interest income. The preferred ones are characterized by a mirror opposite - lower risks and, accordingly, lower returns. Here the preferences of the shareholder decide: ordinary, interesting for large founders who want to have the opportunity to directly, comprehensively influence the current course of affairs. Preference shares are oriented towards a contingent that is only interested in stable dividends. In addition, each promotion includes several typical types of value:
- Nominal - the amount identified when issuing a share, reflecting the incoming share of the joint-stock community fund, in proportion to which interest dividends are accrued. The value of the total authorized capital is formed from the nominal costs determined by the issuer.
- Emission value. The price of the initial initial offering of shares purchased by the first holder, it can be commensurate with par or exceed it.
- Market value. This indicator is the most interesting and attractive for the investor. This is an ordered price of purchase and sale, fixed by the stock market directly at the current moment, based on the current demand for specific shares. The calculated ratio of the declared price and the number of outstanding shares reflects the real indicator of the companys capitalization.
Before investing personal funds, every sane investor is obliged to make a preliminary assessment of the quality of shares, their liquidity, weigh investment risks, based on the result of which, proceed to responsible decisions. The stock market is, of course, a practical and technologically advanced way of investing personal finances in business structures today, but it requires a certain level of literacy and care. Learn more about buying shares...
However, stocks are not the only liquid securities that attract investment eyes. Bonds are also attractive to investors. To decide on financial claims, it is important to have a meaningful understanding of what they carry.
Defining a bond and what you need to know about them
A type of securities is a bond, which provides for the legal status of the owner to receive from the issuer the pledged nominal value within a predetermined period. That is, they are a kind of equivalent of a loan, giving the right to resell and receive an additional fixed percentage. The global popularity and practice of placing bonds positively characterizes this type of financial activity.
Bonds imply a nominal price and, accordingly, a redemption price used by the issuer in case of early redemption. The term of interest payments is preliminarily fixed in the issuance conditions; various calculation schemes can be applied here: annually, half-yearly, or quarterly. As for the payment methods directly, the world practice has a lot of them. The main ones are:
- Fixed interest payment. Perhaps the most well-known, intelligible and simple form of bond settlement.
- Step payment of interest. In this scenario, several key dates are set, upon reaching which the holders of bonded assets have the right to immediately receive financial compensation, or extend it until the next calendar date, of course, with a subsequent increase in the interest rate.
However, payments are not limited to such a set, floating interest rates are often used, when, based on the dynamic calculation of bank rates or an increase in the level of profitability of securities, the percentage of payments may change, the same six months or quarterly. Sometimes, as anti-inflationary measures, indexation is carried out in relation to the growth of consumer prices. But there is a category of bonds called "discount" bonds, where interest income is not provided at all. For a certain category of investors, they undoubtedly represent a kind of attractiveness, because they are initially sold for less than their face value, but the redemption is carried out at a fixed face value.
In view of the insignificant profitability, in the overwhelming majority of well-known cases, the issue of bonds for a short-term period is not calculated, it always exceeds 1 year. The legal status that allows the issuance of bonds is not only vested in purely government institutions, there are many varieties of them: corporate, municipally owned, and even government debt bonds. Each is commensurate with an analogue of a loan, when a certain enterprise, a trading company or an entire state, on deterministic terms, borrows not from ordinary banking institutions, but attracts private investors who are ready to invest and increase their capital.
The interest of bonds is in the possibility of a return sale to the issuer, regardless of whether his enterprise operated profitably and profitably or was completely unprofitable, which cannot be confidently asserted about shares. The institution exhibiting bonds and acting as a guarantor is obliged to redeem them according to the agreed period with interest due. True, a significant reservation should be made regarding bankruptcy, according to which bondholders are often unable to return their invested funds.
After laying out the key points regarding bonds and stocks, it is quite possible to carry out a comparative analysis, allowing private investors to recklessly determine, based on preferences, financial capacity and willingness to take risks.
Basic features of the difference between bonds and stocks
The bond price, by definition, cannot decrease, it can only increase or remain at the same level. Shares do not provide such guarantees, here the price range varies, often based directly on market fluctuations, which significantly increases investment risks.
In case of luck, the shareholders will directly increase the invested capital. The income of bonds is always known and very moderate, but always guaranteed.
The holders of shares are provided with the right to vote and participate in the management process of the company, the holders of bonds are deprived of such privileges.
Stocks are prone to frequent price fluctuations, bonds offer relative stability and predictability.
Regardless of the choice, a novice investor needs a certain strategy of his own. Initially, it is necessary to analyze the market, soberly assess the knowledge in the invested niche and decide on the amount. Only on the basis of the totality of these criteria to plan an investment strategy. The strength and degree of influence of certain market factors is not constant, therefore, it is necessary to closely monitor the corporate background and devote time to the analytics of investment companies in order to make objective decisions.
If the economic growth of the company is predicted, then it is naturally wiser to invest in stocks. With a clear downward trend or economic instability, the likelihood of a decrease in quotes increases and it will be a pragmatic action to invest in bonds. Ideally, it is desirable to form an investment portfolio with the inclusion of a diverse range of securities in circulation in order to be able to reduce risk diversification. In conclusion, I note that even guided by these rules, you can confidently count on profitable investments.
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The cost of Eurobonds is indicated not in rubles, but in foreign currency. Usually in dollars or euros.
Give the opportunity to receive income in foreign currency.