Stocks vs Bonds
I love that my readers are thinking about investments!! I hope we all bread win one day and investments will certainly help. The big question is should you invest in stocks or bonds or what? I thought it would be a good idea to write a quick article explaining what both stocks and bonds actually are to help us make the right investment choices for our own personal goals.
In short, they are two different ways for a company to raise money.
Stock
A stock is simply a share of an individual company. You can think of it as an ownership percentage. For example, if a company has 100 total shares and you buy 10 of them then you would be a 10% owner (my boyfriend tells me this is a gross exaggeration). Stocks are often referred to as ownership. So in my overly simplistic example… *rolling my eyes*… if the stock moves from $5 to $10 then I would have made $5 per share. Since I own 10 shares my investment would have grown $50. Sometimes stocks pay dividends also. This is where a company may return some of its profits to its shareholders. So let’s say this company pays $0.50 dividend per year per share. So after one year the stock increased by $5 per share and I also received $0.50 per share. So my investment increased by (10 * $5) + (10 * $0.50) = $55.
Bonds
A bond represents debt. A government or corporation needs to raise cash so it borrows money. Buying a bond is essentially loaning your cash to the company and they will agree to pay you back when the bond matures plus some interest. The length of the bond or expiration is always known ahead of time and is often referred to as the bonds maturation date. In this example, let’s say we like a $1,000 bond that pays %4 interest. That means that we would get $40 annually until the bond matures. Then once the bond matures we would get our $1,000 back.
In both cases, I neglected to mention stocks that decline and a bond issuer that is unable to make the payment at maturity. There are always financial risks and it is important to consult with a certified financial planner or adviser!
Which is right for you?
Most people like to invest in both stocks and bonds because of the diversification. The idea being not to put all your eggs in one basket. Someone once told me that you should do 100 minus your age and that is the percentage of your investments that should be in stocks. The remaining percentage should be in bonds.
What do you guys think? Anyone with an investment portfolio out there care to chime in?
