Should you invest in bonds or stocks?

 You have decided to invest but still do not know what to invest in? We will explain the differences between the two of the most common alternatives when it comes to putting your money to rent. Bonds and stocks are the most classic, and although they can be confusing because of their similarities, today, we will teach you how to identify these notorious differences.

Bonds

When you acquire a bond, you deliver your money to the entity that issued it, a private company or a local or national government. The latter agrees to return it to you in an agreed time by both parties and give you an extra percentage, which is the interest and the real benefit of doing the operation.  

From the point of view of the entity, the bond is a debt. For the investor, it is a fixed income instrument because he knows from the beginning that he will receive interest.

Stocks

When you invest your money in the shares of a company, you immediately become a partner and obtain rights and obligations. No matter the number of shares, no matter how small this number is, you will still be a partner, and a piece of the company is yours. Of course, the power of decision does influence how much these shares represent within the percentage of share capital.                                               

The sale of shares represents an increase in equity for the entity since the new partner is contributing capital. It is a variable income instrument for the investor who bought a real piece of the company. There is no contract or an agreement to return the money. It all depends on the situation of the company. The owner shares the profits and losses of the company, and if the organization performs well, it can receive the benefits. The more shares, the greater the dividend will be received. On the flip side, if shares dropped, the investment value will decrease, meaning a loss.

Similarities

Both bonds and stocks are instruments that exist within the capital market. For the investor, they are a way of making use of their money and obtaining liquidity for the issuer. In both cases, and before carrying out the operation, the person must ask himself: how much money does he have and of that amount, how much would he be willing to lose? What is the risk you want to take? What is the time you can wait? and how much do you want to earn?

Differences

The shares are perpetual. You will own them as long as you do not sell them. Instead, the bonds have a term of operation that is agreed in the contract.

The bonds return the total amount of the invested capital. The risk is much lower than that of the shares. Shares price varies depending on the market value. It can exceed any profitability limit or not leave profit any since profitability is not assured.

Holders of shares acquire certain rights, in some cases, having the possibility of voting, which the holders of the bonds do not get.

Bonds can create a steady stream of income while stocks, the possibility of higher returns.

Stocks can protect against inflation. An increase in this value can affect the actual payment for the bond.

In general terms, the money invested in purchasing bonds can be higher than that of stocks.

What is the best investment for you?

The answer is simple. It depends on you and your investor profile. Bonds fit a conservative profile, while stocks are aimed at riskier people. Suppose you are not in a hurry to obtain profitability; you want it in the medium or long term, you could become a shareholder. But if you do not want to wait so long and want, at least, to have a specific date, the recommendation is to acquire bonds.

It does not matter if your final decision is bonds, stocks, or building a portfolio that mixes both. Before investing, it is always critical to know how the financial assets work, learn the company or entity you invest in, the short, medium, and long-term perspectives to get the best out of them.