The Risks of Bonds Vs. Stocks

Stocks offer unlimited earning potential as opposed to fixed rate bonds.

Stocks offer unlimited earning potential as opposed to fixed rate bonds.

Deciding how to invest your money is a daunting task. Anything that involves your hard earned cash and even the slightest risk should be considered carefully. While a diversified portfolio, containing multiple investment options, is always best, you should be aware of the risks associated with both stocks and bonds before sinking your cash into either one.

The Basics

When it comes to separating stocks and bonds, it all comes down to ownership. With stock, you take ownership in a company by purchasing shares. In return you share in the profit and loss of the company as it impacts the value of each share of company stock. Bonds are basically loan. With a bond, you loan money to a company for a specific amount of time with at a fixed interest rate. You will be paid interest over the term of the bond and after it reaches maturity you will get your principal investment back.

Earning Potential

The unpredictability of the stock market is two-fold. On one hand, purchasing shares of stock in a company that performs well can mean unlimited earnings for you. On the other hand, you need to be ready to sell your shares before the company takes a turn for the worse and you wind up losing money. Bonds offer a fixed interest rate over the term of the loan so you always know what you will make. The downside is that if the company winds up performing well during the term of your bond, you don’t get to share in the profit.

Accessibility

By purchasing a bond, you essentially become a lender and as with any loan, you’ll have to wait until it reaches maturity to profit fully from the interest rate. Because life can be as unpredictable as the stock market, you run the risk of not having access to your money if you need it for unforeseen circumstances like job loss or medical care. Stocks offer more accessibility to your cash, since you can simply sell your shares at any time.

Security

Risk is something stocks and bonds have in common, so what it boils down to is determining which is the safest investment for your money. Do your homework before investing in any company. Bonding into a relatively new company is far riskier than purchasing stock in a well-known company that consistently performs well. Even though bonds offer the security of a fixed interest rate, there is always a chance that the company could go bankrupt and leave you in the cold. Investing in government bonds offers the most security but also the lowest returns.

About the Author

Based in South Florida, Leann Harms has been writing since 2008. Her design, technology, business and entertainment articles have appeared in "Design Trade" magazine and Web sites including eHow. Harms has a Bachelor of Arts in English from Florida Atlantic University.

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