Bonds vs. Stock Market

Figuring out the proper allocation of your money is crucial for successful investing.

Figuring out the proper allocation of your money is crucial for successful investing.

New investors are always looking for the best ways to grow their money and secure a solid financial future. Stocks and bonds are the two most popular types of securities used in a well-planned and fully diversified portfolio. You should consider several factors when determining which investment vehicles to purchase or how much of each to put into your mix.

Definitions

Bonds are investments that are more like loans. An investor turns over a certain amount of money and receives interest for the use of his money. They are usually sold for specific amounts, such as U.S. Treasury bonds, which are sold in increments of $1,000, and come with a coupon rate that dictates the amount of interest you get. The stock market is a vehicle for investors to buy and sell shares of stock in different companies and potentially reap high profits. Shares are actually bits of ownership in a company, but shareholders are generally only concerned with price fluctuation and are disconnected from the company itself.

Features

Bonds gives investors a specified amount of interest and are for the most part very predictable. If you purchase a $1,000 bond with a coupon rate of 6 percent paid out twice annually over 30 years, that's what you'll usually get. Stocks can be bought and sold at any time and for any price. They are completely unpredictable; you never know if prices will rise or fall. You can buy both stocks and bonds through a brokerage account, either with a traditional stockbroker or through an online discount broker. You can also purchase bonds directly through the U.S. Treasury or an issuing bank.

Benefits

The purpose of both bonds and the stock market is for investors to net returns. In the stock market, you have the opportunity to invest as much or as little as you want. Stocks are also extremely liquid, so you can sell whenever the need arises. Bonds are sold in specified amounts and are not as liquid, but they can resold on secondary markets if you need to sell before the date of maturity. The main benefit of bonds over stocks is their security.

Risks

Stocks are extremely risky since their are no guarantees that a stock price will go up or down. If you research carefully, you have a better chance of picking good stocks, and if you diversify, you lessen your risk of loss. Bonds, on the other hand, are low-risk in most cases. U.S. Treasury bonds are considered risk-free, and most bonds issued by banks or quality organizations are thought to be secure investments. There is always the risk of default, but it's unlikely. Bonds classified as "junk bonds" offer high yields but have a high risk of default, meaning the issuer may be unable to make required payments.

About the Author

Jennifer Sable has been freelance writing since 2007. She has written copy for Pretty Me Maternity and frequently reports for 100 Ftse Index News in addition to other fashion and business websites. Mrs. Sable holds a finance degree from Yeshiva University and a Masters of Arts in public administration from New York University.

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