Stocks Vs Bonds – Role of Owner vs Role of Lender
A major consideration for investors is whether they want to invest in stocks vs bonds. In order to make this decision, however, you need to understand exactly what each option is, and how it can affect your investments over time.
Owner vs Lender
The most important difference between stocks vs bonds is your role in each. If you invest in bonds, you are acting as a lender to the issuing organization. When choosing stocks, you obtain a part of the ownership of the entity.
This ownership status provides additional benefits, including the right to take part in voting on the decisions that will affect the company in the future.
The manner in which you make money on bonds vs stocks is also important. If you choose to invest in bonds, your earnings will be in the form of interest. This interest accrues over the life of the bond and is determined by the current interest rates of the agreement.
Stock investments allow you to earn income based on the profits of the business. This means that if the company is doing well financially, you will see an increase in your earnings. However, if the organization is losing money, struggling or releases negative news, you will likely lose money as well.
Bankruptcy Impact on Stocks vs Bonds
Bankruptcy and its impact on your investment is also important to consider. If a company goes bankrupt, bondholders are at the top of the list of those who will receive money from the remaining assets or sale of the company.
However, if you are a stockholder in an organization that goes bankrupt, you are generally at the bottom of the list. In most cases, this means that you have a much greater potential of losing your entire investment as bondholders and creditors generally eat up any money left from the company.
Stocks Return vs Bonds
Another major factor in the stocks vs bonds decision is the average returns of each choice. There are a number of entities that compare returns for bonds and stocks over a set amount of time, providing a broader picture of the earnings potential for each.
The following provides the 10-year history ending in 2013.
The S&P 500 index, which is a performance measure that applies to major US companies, showed that the annual average return was 8.11 percent on equities.
In comparison, Barclays Aggregate US Bond Index reported that the average return for bonds during the same period was 4.62 percent.
While these numbers differ greatly, there are other considerations that bring these averages closer over the 10-year period.
For example, high-yield corporate bonds averaged 7.98 percent, and emerging markets averaged 7.78 percent. In comparison, investment-grade corporates (all-maturities) averaged a return of 5.49 percent.
Again, while these numbers do differ, it is also important to look at the overall risk involved with stocks vs bonds.