Which Should You Choose Bonds Or Stocks?
Strange that stocks is the word on everyone's lips and there is so much written about them. Why is that so, one wonders when bonds are far less risky and the returns you earn on them are not to be scoffed at.
It's probably the thrill that stocks bring in their wake. It invokes the gambler in a person. Worse, if it were to go up due to some market movement, the one who bought the stock is absolutely convinced that he has a lucky streak or that he is extremely discerning. However, one has to face up to the fact that a stock is a volatile commodity and there are times when the swings can be quite upsetting.
Bonds are by and large the old faithfuls – reliable, even boring. You have the corporate AAA or the government bonds that pay an unexciting amount and you have the higher paying 15% bonds which could turn out to be junk bonds. Sure, there is the element of risk here too but it is far lower than playing the stock market where you don't often know which way the wind blows.
You need more money to buy a bond. You could get one for a price that could be equivalent to a hundred $10 shares in a company. You also have a choice of mutual funds – these are funds that invest in bonds. There are specific programs and you could ask your broker for those details.
Unlike stocks which can be bought and sold ever so quickly, bonds are not as easy to sell. You cannot do online trading in bonds like you do with stocks. You might need to make a call to do so and the commissions you have to pay too are usually larger. They are not traded by all brokers and you will have to ask your broker to list out the options.
From a short-term point of view, bonds are not as volatile but you do find changes when there are interest rates changes or certain other economic triggers. With bonds, you get a coupon rate unlike the dividends with stocks which could be subject to the management's fancies. This coupon rate is a rate that is fixed when the bond is issued and in case you want to sell it, this is what the buyer will also look at. You also have a maturity date on the bond and on that date, the total amount for which the bond is made out has to be paid to the bond-holder. The amount of time to maturity is another factor that affects a bond's sales price.
The government has a much stronger influence over bonds than stocks and their policies – whether it is regarding lending rates or any other economic decision as well as any legislation that affects economic policies or insurance or banks.
If you want a reliable factor to be present in your portfolio, don't put all your eggs into the stock basket – a healthy mix with the reliability of bonds thrown in, is always preferable.
Comment by Christopher Whalen
