When it comes to investing money, most people know that investing in bonds and stocks can be very risky. However, it is difficult to understand. Few people know how to investment in stocks and bonds. People invest in stocks for growth (increase in the share price) and earn income as dividends. People invest in bonds, master mind, the income paid by bonds, because bonds pay higher interest than banks pay. The aim of this paper is to evaluate these two investment options.
Investing in Stocks and Bonds
There is a constant fluctuation in the share price, which creates risks. Anyone can invest in the stock market and make money. But, if the market falls, investors do not mind practicing make money. Instead they lost (Bekaert & Wu, 2000, pp.1-42).
Like stocks, there is also a price fluctuation, which means that there is also risk associated with bonds. However, bonds are safer than stocks because prices are not as severe, and bonds pay higher income (interest) shares (dividends). But note that you can also lose money to bonds (Campbell & Shiller, 1988, pp.661-676).
Analysing Both Options
The economic and financial news, become a barrage of bad news. The stock prices fall and continue to fall. The prices increase while investors sell their shares and acquire bonuses. Many investors use this investment strategy in stocks and bonds to offset losses in a situation like this (Baker & Stein, 2004, pp.271-299). On the other hand, it might interest rates and inflation rise dramatically and continue to rise. The stock prices are a long fall and bond prices fall simultaneously. Investors are not making money on bonds, or with shares. So the investment strategy to reduce the risk in both options does not work.
Investing in shares is for people who want to grow their money and are willing to accept the risk. Investing in bonds is for those who want higher income when investing money, but also include the risk that involves (Hull, 2007, pp.98-122). By investing in a portfolio of combination of both, the risk usually is reduced, but not always.
Smart investors know that in periods when interest rates and inflation rise, both investments can get a big hit. Stocks fall as corporate earnings fall. Bonds fall due to risk in the interest rate. Moreover, inflation makes the future price of a bond less attractive in term of income. Most investors sell at low prices.
Analysing the Bonds
Safe Haven for Money
Shares and bonds are the most common tools for those just entering the investment world. In essence, the difference can be summarized by saying that while the bonds are debts, stocks are a belonging, a property.
This difference leads to the first major advantage of the bond, generally investing in debt is safer than investing in the equity of a company (Baele et.al, 2004, pp.23-28). The reason for this is that if a company goes bankrupt, debt holders are ahead of shareholders to be paid ...