What Are Stocks vs Bonds?
Stocks and bonds are vehicles in which people can put their money into and potentially see growth. This is what people call types of investments.
Stocks can be viewed as equity, because people who invest into stocks are part ownership of a company. Essentially, if a company does well, its shareholders are provided a share of the earnings. Even if it’s a very small portion.
Bonds can be viewed as debt, in which investors provide to companies, governments, or municipalities. When an investor purchases a bond, they are lending money in exchange for interest payments in addition to the return of the bond’s face value when the bond matures.
This post is about what are stocks vs bonds.
Let’s dive into the top 5 reasons for investing into what are stocks vs bonds.
Top 5 Reasons for Investing into Stocks:
1. Potential for High Returns
Stocks have the potential to provide higher returns than other avenues of investing, like bonds. Investing in stocks allows investors to choose their favorite company to invest in, and potentially make a profit from. As we’ve seen with some companies, there are times when people can make some incredible gains.
2. Ownership in Profitable Companies
As mentioned above, purchasing stocks means an investor becomes a shareholder. So when you purchase stocks, you become a partial owner, which means you’ll have the opportunity to partake in the company’s profits if/when the company does well.
3. Diversification
Stocks are a great platform for diversification. To start, stocks, themselves, are incredibly diverse. Since purchasing stocks means becoming a partial owner, there are companies that range from small to absolute behemoths. That also means, you’re able to invest in the more volatile, but potentially higher paying companies to the more stable, but likely lower paying companies.
4. Dividend Income
Some stocks offer periodic dividend payments. If an investor has enough investments that offer dividend payments, this could prove to be a steady income source. This is a great tool for retirees who are no longer receiving regular paychecks from their jobs.
5. Hedge Against Inflation
Since stocks have the potential for higher growth than other types of investments, stocks can also be a hedge against inflation. Companies may adjust their prices and earnings relative to the cost of living increases.
Top 5 Reasons for Investing into Bonds:
1. Stability
Bonds are lending money to companies, governments, and municipalities. Governments and municipalities are less likely to unravel, which is why bonds are seen as the more stable investment.
2. Risk Mitigation
Bonds issued by governments or large, well-established companies, are generally less risky than stocks. As mentioned above, they are less likely to unravel.
3. Liquidity
Different bonds have different degrees of liquidity. Treasury bonds are known as being highly liquid as they’re issued by the government.
4. Tax Benefits
Depending on the bond, there could be tax benefits that come along with investing in the bond. Bonds have options where the interest income may be exempt from federal, state, or local income taxes depending on what the interest income is used for. For example, the interest earned in Series I bonds are exempt from state and local tax if used for education.
5. Predictable Income Stream
Bonds can be a predictable income stream, because they have a specific maturity date. Once the maturity date passes, you, as the investor, have the option of cashing in the bond along with the interest earned from that investment. For that reason, bonds can become steady, predictable streams of income. This is especially beneficial for those who are retired.
To reiterate, the top 5 reasons for investing into what are stocks vs bonds are:
Stocks:
- Potential for High Returns
- Ownership in Profitable Companies
- Diversification
- Dividend Income
- Hedge Against Inflation
Bonds:
- Stability
- Risk Mitigation
- Liquidity
- Tax Benefits
- Predictable Income Stream
There you have it! Interested in learning more about investing into bonds? Check this post out for the pros and cons of Series I bonds.
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