With stocks and bonds investing, there is a wide selection of money-making opportunities available. These investment instruments are two of the primary investment avenues for most people. Prospective investors should know that each of these investment types serves a different purpose. That's why both of these should be included in any substantial investment portfolio.
Stocks and bonds are two of the most popular financial instruments because they are popular with the masses. They provide a person with the opportunity to invest in a company.
The person, as an investor, can reap the rewards of future profits if the company if profitable. While both of these financial instruments offer the opportunity for financial reward, each plays a different role in the share market.
Many financial experts do not believe it wise to favor bonds over stocks. Instead, they feel an investor should have a variety of assets. Investors need to consider how the various assets relate to each other in regards to risks and returns.
Stocks are shares of a company. Investors buy stocks and become a co-owner of the company. The company stock reflects it's stability. An investor, wanting to avoid risk, must invest in the stocks of stable and reputable companies. There are three categories of stock: blue chip, small cap, and mid cap. The stock group would determine your stake in the company.
The value of a stock fluctuates, unlike bonds. The stock's value is based solely on how well the company performs. The company's performance determines the profit on shares.
With a bond, you are lending money to the issuing party. The party, in turn, will give you interest at some time in the future. The bond's value is determined by the market interest rate of the scenario. Bonds are available for sale or purchase in the open share market. You buy bonds in the same way to buy stock.
The value of the bond investment comes from the interest rate the investor earns. If you own a bond that has a 3% interest rate while the general interest rate for the market is 2%, then you can sell this bond on the open market for a higher face value.
Bonds, unlike stocks, have a limited risk. You will receive a fixed interest amount whether the issuing party is confronted with a loss or not performing to expectations. Bonds also have a pre-defined time frame which is different than stock. The bond expires after a fixed maturity date.
The principal investment amount is returned to the investor after the bond expires. The only risk in buying a bond is that the issuing party may not return the principal investment. That's why it's important for an investor to invest in issuers with a sound reputation.
Balance and diversification are the keys to successful investing. You should have both stocks and bonds in your portfolio to ensure your risks and rewards are balanced. There are times when you may want to invest aggressively, and other times you should be more cautious. With looming interest rate hikes over the market, this is not the best time to throw caution to the wind.
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