What are the advantages and disadvantages of buying stock instead of bonds?

Answer:

Stocks and bonds differ dramatically in their structures, payouts, returns and risks. In order to answer the question about the advantages and disadvantages of owning one over the other, we have to go through a brief description of how stocks and bonds.

Bond is a form of debt with which you are the lender and not the borrower. Bonds are contractual loans between the investors and institutions that, in exchange for funding that will pay the premium for borrowing, known as the coupon. In addition, the nominal value of the bond is returned to the investor at maturity. The guarantee of payback and all coupon payments relies solely on the borrower’s ability to generate sufficient cash flow to repay the bonds.

Stock is a form of ownership; they represent participation in the development of the company. Typically, investors are given no promises about returns of the initial investment. In fact, your ROI depends almost entirely on growth in stock prices, which, at its most fundamental level, is directly related to performance and growth (increasing profits) of the Company.

So this leads to the original question: which is better? The answer is no. Stocks and bonds both have their pros and cons depending on what you are looking for. For example, for risk investors seeking safety of capital and who prefer a known periodic payment structure (i.e. coupon payments) for a limited time it will be better to invest in bonds. On the other hand, investors who are willing to take on greater risks than bondholders and who would prefer to engage in shared ownership in the company and unlimited growth potential of stock prices to invest in stocks.

However, the lack of stocks compared to bonds is that stocks are not guaranteed to return anything to the investor, while in basic, bonds offer fairly reliable results due to the coupon payments. Thus, opportunities for high income with more shares, but also the possibility of losing money.

For most investors, a combination of stocks and bonds is the best of the situation. Diversifying your investments and to place money in stocks and bonds, you warrant to safety, leaving some opportunity for above average returns in your stock investments.

For further reading, check out our Stock Basics Tutorial and the basics of bond Tutorial.

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