You buy "shares" of stocks, because this type of investment means you own a share of a company. You benefit if the share price goes up or if the company pays a stock dividend. When you buy a bond, you loan money to a company or the government and the bond issuer pays you interest. Either stocks or bonds can make money. You may consider how each type of investment has performed historically before you choose your strategy.
Government Bonds vs. Stocks
Stocks earned an 11.28 percent annual return on average from 1928 to 2011, according to New York University's Leonard N. Stern School of Business. Bonds during that same period earned 5.41 percent. This indicates that stocks have provided better returns over the long term, though a stock investor certainly could have incurred major losses in any given year. Government bonds offer less risk than stocks. You pay for that safety by getting a lower return. In investing, high risk means a chance of higher rewards, and low risk indicates the likelihood of lower rewards.
Corporate Bonds vs. Stocks
Compare to stocks, corporate bonds have performed well recently, as of the date of publication. According to Seeking Alpha (SeekingAlpha.com), investment-grade corporate bonds have outperformed stocks since September 2008. Investment-grade bonds are those rated BBB/Baa or higher by bond-rating agencies such as Moody's or Standard and Poor's. These corporate bonds moved into positive-return territory and had consistently higher returns than stocks through May 2011. Stocks showed negative returns from the start of the same period until January 2011, while investment-grade corporate bonds began offering positive returns in 2009.
What "Returns" Mean
When you hear about returns, you are hearing about price appreciation plus dividends or interest. For example, a stock may go up in share price and pay a dividend. The total of these two factors determines the return. Similarly, bonds that pay interest can also go up in price. This happens when investors favor them over stocks or when the company that issues the bond shows strong sales growth and profitability. The increased demand means bond sellers can ask for a higher price. The combination of the bond price appreciation and the interest it pays determine the total return an investor will receive.
Your Time Frame
You have to think about your own time frame for your investments before you use historical performance figures for stocks vs. bonds. For example, though stocks outperformed bonds from 1928 to 2011, bonds did better during the sub-period from 2002 to 2011. Stocks earned an average of 4.93 percent during that sub-period, while bonds earned 6.85 percent. You should use historical data as a rough guide. Make your investment decisions based not only on how well stocks or bonds have done but also on how long you intend to hold them. You can sell stocks as often as you want, so you can use them as short-term investments. Although you can also sell bonds, most investors look at bonds as long-term investments.
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