Want to achieve financial goals with less risk and more reward? Learn more about Stocks vs Bonds
“An investment is knowledge pay the best interest.”-Benjamin Franklin
Are you the one, who wants:-
Higher return on investment?
Willing to take the risk?
Consistent growth on your savings?
Desire to achieve financial growth?
The one-stop solution for your complication is ‘getting higher interest with calculated risk.’
Yes! You read it right,A solution! This article will be the one to fulfill your aspiration.
Stocks vs bonds
Before starting, I believe that you are well aware of compounding and the surprising results of it. If not, then let me summarise it for you.
Your investment =₹100
Deposited term =20 years
Then with interest of X% per annum returns you get will be:-
|Rate of interest PA||Returns on initial investment|
As you can see, a slight increase in interest rates; and returns you will get on investment can grow your capital in multiples. There is 5- 7% interest on FD in India. To beat these returns and gain more interest we focus on other investment options available such as shares, commodities, mutual funds, Forex, real estate, bonds, dividends, crypto, etc.
Each instrument has its own pros and cons. Depending on the individual one can choose different ways to invest.
In this article, we will be focusing on the difference and similarities between stocks and bonds. The parameters taken into consideration are:-
Table of Contents
Whenever an organization or company or firm require capital to expand their business to pay debts or to manage their activity or any other reasons, the promoter sells their holding in the open market to let, outsiders (i.e. other investors) to become the owner of their companies depending on a number of shares in percentage basis they hold.
In general, the minimum amount you need to invest in the company to become a shareholder of it can be termed as stock or share or equity.
Read more – How to invest in stocks?
Similar to the above condition of raising funds, the promoters who need capital but do not want to share their ownership with other investors can opt for bonds.
A bond asks for capital in exchange for fixed returns. Mostly the returns are higher than fixed deposit returns in banks. As an individual owner who invests in bonds takes that risk.
Bonds are loans given by investors to the firm in exchange for fixed return in fixed tenure.
2. Issuers – Stocks vs Bonds
The one who needs capital and authorized by regulatory bodies to issue different securities can be termed as issuers.
They are issued by private firms, organizations, corporates, industries, public sector enterprises, etc. Sharing ownership with investors.
They are issued by the government, municipalities (state), PSC, corporates private firms, and organizations.
An issuer issues capital funding through equity or debt eg stock or bonds. Therefore anyone eligible to buy those securities (equity or debt) from the issuer is called the lender.
Lenders for both stocks and bonds can be individuals, private firms, organizations, governments, and corporations.
4. Market for Trading – Stocks vs Bonds
A market is a place where buying or selling takes place. Whenever a stock or bond is issued by promoters they are subscribed to the primary market also called an IPO initial public offering. Once these instruments are subscribed now they can be listed and traded in an open market called a secondary market. A platform for the primary and secondary market are provided by stock exchanges e.g.NSE and regulated by government bodies e.g. SEBI
The place where stocks are traded is called the stock market. In the primary market, stock is issued through stock exchanges e.g.NSE, BSE and later traded in secondary market e.g. platform are provided by NSE, BSE
Bonds are subscribed or buy in the primary market through IPO offered. They can be traded in the secondary market similar to stock. But liquidity is far less than stocks. NSE also provides a platform for bond trading for listed bonds. Some other platforms like golden Pi, wintwheel will also provide a platform to subscribe to bond IPO and trading of the bond.
When you own a stock or bond it has to be stored somewhere (now in electronic format -dematerialized form).
Stocks are stored in your DP account also called a Demat account.
Bonds are initially accounted with CGSL constituent general securities Ledger. But, they can also be transferred into your regular DP account through which you can treat them in the secondary market.
6. Transaction cost – Stocks vs Bonds
Every time you buy or sell stock from your broker you have to incur some transaction cost and brokerage.
Similarly, trading of bonds also accounts for a transaction cost the same as stocks.
7. Minimum investment required
Since stock prices are generally based on IPOs in the primary market and market prices in the secondary market. One can invest in different stocks varying from penny to blue-chip. One can also invest in single stock depending on investment strategy or planning.
The minimum investment in bonds in India starts from ₹ 10,000 onwards. If you want to subscribe to a bond at IPO then you should invest at least rupees 10,000 or more depending on the price decided by the issuer. This price is called the face value of bonds.
When bonds are traded in the secondary market their prices fluctuate due to change in interest rates and sometimes they are available below par( ie below their face value).
It is a fixed amount of time you need to hold your investment.
Stock does not have any fixed tenure. They can be sold as per investor requirements at any point of time after purchase.
Since bonds act as loans to the issuer, they are followed by fixed tenures.
Bonds with tenure less than one year are called commercial bonds for bills.
Tenure of 1 to 10 years is called notes.
Tenure of 10 to 30 years is called bonds.
Commercial bonds, bills, notes are all bonds with different Tenure.
9. Returns – Stocks vs Bonds
Here comes the most awaited topic!
As the old saying, “higher the risk higher the reward.”
First, we will talk about returns
Owning a stock makes you a shareholder in a company. You will be eligible to get rewarded through dividend payout, bonus, right issues, split, mergers, buybacks, capital gains due to increase in stock prices, voting rights.
Theoretically upside growth potential in stock is unlimited
As bonds are predetermined agreements between an issuer and lender, the upside growth is limited. A bondholder gets fixed or variable returns depending on the types of bond one own.
Bonds can give you regular interest payment or a capital gain if resold at a higher price in the secondary market.
The most important aspect of any kind of investment or transaction is a risk. Mostly neglected- but believe me, the only thing you have to manage is reduced risk or be aware of the risk you are taking.
Once you eliminate/reduce/aware of the risk then rest his reward.
As stock carried unlimited upside potential it also comes with downside risk. Being a shareholder you are exposed to both systematic and unsystematic risk.
E.g. inflation, interest rate, reinvestment, liquidity, business problem, market fluctuation, ETC.
Anything can affect the market as a whole or only sector and companies you are investing in can be a risk to your capital. You should be properly aware of it and act accordingly.
Being predetermined agreements bonds carry less risk than stocks. The risk involved here is systematic. I.e. events that can affect the whole market, inflation, exchange rate, interest rate, PTC.
11. Pledging – Stocks vs Bonds
Mortgaging your assets to create credit is called pledging.
Stock can be pledged or mortgage to create credits and margins.
They can also be pledged or mortgage.
12. Skill Require
To invest either in stock or bonds one must consult an investment advisor.
Also managing portfolio, research valuation, and trade execution are some basic skills you must possess.
To trade or invest in stocks you must have some basic understanding of technical analysis, fundamental analysis, price to book value, dividend yield, corporate action, ETC.
To invest in bonds you should be well aware of bond yield, YTM, bond rating, interest rates, Etc.
Types of Stocks and Bonds
Stocks:- Stocks are generally classified based on:-
- Market capitalization
- Ownership offered
- Dividend payment
- Price trend
Bonds:- Types of bonds are
- Fixed-rate bond rate:- Fixed till maturity
- Floating rates bonds:- Interest rate are linked with RBI repo rate, MIBOR, Libor, SBI MCLR
- Zero-coupon bond:- a lumpsum payment on maturity along with compounded interest payment.
- Convertible bond:- one can exchange bonds with shares after predetermined fixed tenure and at a fixed price.
- Inflation-indexed bond:- Inflation and interest are links with the inflation index e.g. WPI wholesale price index, CPI consumer price index.
- Perpetual bond:- Final maturity is not defined. Issuers exercise a call or put option after a certain time.
13. Investing options – Stocks vs Bonds
There are different options or sectors or ways to invest in both the stock and bond market
Stock:- Different ways to invest in the stock
- Equity holding
- Index fund
- Mutual funds
Bonds:- Different ways to invest in bonds
- Government bonds
- Corporate bonds (private companies and public sector units)
- Infrastructure bond (eg. IDBI, NABARD)
- Commodity bonds
- Mutual fund bonds
- Gold Bond
- High upside growth potential
- No minimum investing amount
- Liquidity in the secondary market
- Multiple investment options
- No fixed term holding obligation
- Enjoy all corporate rights
- Can be pledged
- Tax-free in long term
- Less Risk
- Guaranteed returns
- Good source of regular income
- Free from market fluctuation
- Can be traded in the secondary market for capital gains
- Tax-free in long term
- It can be pledged
- Mode returns than fixed deposits
- Add diversity in portfolio
- More prone to risk (i.e.to entire capital)
- No guaranteed returns
- Fluctuating risk
- All types of systematic and unsystematic risk
- Affected by market fluctuations
- limited returns
- Less liquidity in the secondary market
- Systematic disk in the world
- Minimum investing amount and period required
- Denied from corporates rights
Hope we tried to cover the basics of stock vs bonds and the difference between them.
Please go through in-depth guidance from your investment advisor before taking any investment-related decisions.
Remember, the risk is an inevitable part of the financial market or to say risk is everywhere in life. Be aware of it and Invest wisely.
We are glad to hear your comments, suggestions, and requests.
Happy investing and trading!