Stocks vs. Bonds

Stocks vs. Bonds

Both stock and bonds are securities which may be included to investor's portfolio.

Stocks (shares) are the kind of securities the investors can buy and trade on the stock exchange. Stocks offer an ownership stake in a company, which means that the owner of stock is partially the owner of the company which issued the stocks (he has right to vote and receive dividends).

The stocks are equities and are issued by the company in order to raise its capital resources. The price of the stock reflects the value of the company. The number of stocks of a given company multiplied by its price means its market capitalization.

The value of stocks volatile and thus such investment is quite risky. The investor does not know the exact value of the stock in the future and thus he is not able to assess the future rate of return from its investment with high probability.

By buying the bonds, the investor do not buy the part of the company but gives a loan. So, by issuing bonds, the company is "taking a loan" from those, who are willing to buy these securities. It means, that bonds are a form of debt and because of that, its value appears as a liability in the company's balance sheet.

Bonds are fixed-income securities. It means that they are safer than stocks because the investor is able to assess the future rate of return of investment with higher probability than in the case of stocks. The investors earn an interest rate on the bond which is called "coupon rate".

So, in summary:

Both stocks and bonds are securities in which it is possible to invest. The amount of both components in the investor's portfolio depends on his attitude toward risk and appetite for profits. The higher profit expectations the more stocks are included in the portfolio and opposite.

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