Stocks and bonds are entirely two different things yet both are different sides of a coin i.e. market. Stock is an equity instrument indicates the ownership of investor in a company while a bond is a debt instrument. Stocks and bonds are tradable investment assets – which mean both have a monetary value. Between these two, stocks seem more appealing since they have historically proved to be a very valuable trading asset for the long-term. However, stocks are not successful for short-term and have high volatility that can even eat your entire capital. Even then, if you’re planning to pick stocks over bonds then you must need to consider all the options. There are advantages and disadvantages to picking stocks over bonds.
Here, we’re going to talk about the pros and cons of picking stocks over bonds.
Stocks over Bonds: Overview
Stocks and bonds are entirely different from each other, literally! It is because ‘stock’ is a stake of ownership in a company while ‘bond’ is a debt instrument. Between two, bonds are a less risky option and often recognized as fixed-income securities. It is because, under the debt instrument, investors get the principal amount plus interest in a fixed amount of time while in stocks an investor will have the ownership in the company and can sell the shares to other investors to make profits.
The value of stock price fluctuates every second and prone to the company’s performance, operation, economic data, and sectoral updates, etc. But, in comparison of bonds, stocks have higher potential for returns however the risk is also high. On the other hand, bonds are more reliable when it comes to short-term investing.
Stocks are highly liquid and an investor can sell his/her stock anytime while in bonds, the investor gets the bond’s face value at maturity.
So, the question is, which one is better?
Well, truth to be told – none of them!
If one was better than other then investors won’t use the combination of stocks and bonds to diversify their portfolio to mitigate risk. However, at different circumstances, stocks can be a better option than bonds, and vice-versa.
Picking Stocks over Bonds: Pros
Like we mentioned earlier, stocks have a higher potential to generate returns than bonds. Plus, investors who have good risk tolerance can benefit from investing in stocks for the long-term. Not only they will get higher returns than bonds but also get partial ownership in a company.
Stocks have along-record of giving high-returns in comparison of bonds.
Picking Stocks over Bonds: Cons
Since stocks have a higher potential of providing returns than bonds, the risk factor is also high in stocks as compared to bonds. At least in bonds, you will get a specific fixed return at maturity date while stocks of a company can rise or fall in price, giving the condition of the company in the future.
If the company is facing issues in its respective sector, competitor, or from anything else, the share price could go down. So, there is no guarantee of getting returns in investing in stocks. But, it is not like it happens with every second company.
If you performed thorough analysis and research on the company, you can get a stock that can rise in value manifold over the years. Otherwise, you could lose your principal amount in just a day.