Stocks and Bonds

956 Words4 Pages
In the financial markets, the most common forms of marketable securities are stocks and bonds. Though they have some similarities to each other, they differ greatly in many aspects. Broadly speaking, both financial instruments enable one to invest in corporations, public and/or private, with possible profitable returns in the future.
Stocks (or shares), by definition, are shares of ownership in a company. By purchasing stocks in a company, the investor becomes a part owner, and thereby owns a percentage share of the company’s after tax profits. Stocks/shares have two key characteristics: 1) they can be issued in small denominations: an investor can purchase as many or as few shares in a company as he/ she wants, thereby becoming a
…show more content…
Stocks were rising on expectations of economic recovery later in the year, and bond prices fell as their yields increased (bond prices and yields are inversely related). The yield on the 2-year notes and 10-year notes, which are heavily influenced by the Fed-regulated interest rates and inflation expectations, respectively, increased from .76% to 1.4% and 2.25% to 3.93 during the same period, respectively. Concurrently, the S&P 500 had gained 4.8%, rebounding 40% from March lows.
Though stocks have statistically delivered higher returns in the long term compared to bonds, bond prices are less volatile. The dividends paid out on stocks are uncertain and depend on the distributable profits of the company, the company’s investment plans and cash needs for the same, and other such factors. On the other hand, bonds generally make a pre-specified interest payout to all bondholders periodically, thereby ensuring an assured, known cash-inflow in the hands of a bond-holder. Further, on maturity of the bond, a pre-determined principal amount is paid out by the issuer to the bondholder, to purchase back the bond. Hence, a bondholder who holds the bond to maturity, knows exactly how much he /she will receive both by way of interest as well as principal on maturity. This is completely untrue for stocks, where neither the dividend flow nor the capital appreciation is predictable with certainty.
Bonds are therefore relatively safer
Get Access