When a company wants to expand its business, it can raise capital from the public through securities market by issuing stock or bond.
What are the differences between Stock and Bond?
Stock is a term defined as the ownership of a company. When investors purchase stocks of a company, they will become one of the shareholders and have voting right in that company depended on the amount of shares they hold. Moreover, the investors can earn income from dividend and capital gains. The listed company will pay dividends to its shareholders at least once per year according the company policy and its performance. Furthermore, the price of stock may increase and decrease from time to time; therefore, the investors can trade and earn from the capital gains.
Read more: Benefits of the Stock Market
On the other hand, bond is simply defined as loan. When a company issues bonds, it borrows the fund from the public within a specific period and pay the investors with a fixed interest rate annually. When the bonds reach its maturity, the company will pay the base money back plus interest to its bondholders. For example, company ABC has issued bonds with the par value of $1000, a maturity of 5 years, and a coupon of 4% paid annually. The company promises to pay the interest twice a year. The investor would earn $40 annually for five years. By the end of maturity, the investors will get their base money back ($1,000) and earn from the coupon interest for $200 within these 5 years.
How do you know which one is a better investment?
It depends on the individual. No matter what type of securities you are investing in, you are required to have the investment knowledge, as well as understand about its risk and how to reduce risk too.
- Know the risk of investment
Investors must understand about the risk of investment first because the higher return you may receive the higher risk you may face. You should know how much risk you can tolerate. If you expect high return and can tolerate high risk, you can invest in stocks as the price of stock goes up and down frequently. You can buy in when the price decreases and sell out when the price increase to earn capital gains. If you want a less risk investment, investing in bond is recommended. At its maturity, you will be repaid with your investment amount plus its coupon interest.
- Have Knowledge of Investment:
Before investing, investors should have the knowledge of investment, such as research about the listed companies and learn the analysis method.
- Diversify your Investment
To reduce the risk, you can diversify your investment portfolio by investing in different securities at the same time.
Read more: How to Minimize Risk in Stock Investment?