Stocks Versus Bonds Who Wins?
Stocks And Bonds – The Winner Is Balance
Investing is all about making your money work for you. The goal is to put your money in a vehicle with a positive rate of return, which is usually, but not always, expressed as a rate of interest. There are a number of different investment vehicles, suited to different goals. We're going to cover a series of traits related to all investments, and contrast the two most common investment vehicles – stocks versus bond.
Stocks are shares of a company, either publicly or privately traded – think of them as a small percentage of ownership in the business. As a stockholder, you have some voting obligations for selecting officers of the company, and you'll get paid a share of the quarterly profits (called a dividend).
Bonds are lending money to a company or the government, in return for a promise of more money when the debt is paid back; bond rates are typically in the realm of 2 to 5% APY, and can be held for varying lengths of time. There are products called bond funds that buy a portfolio of bonds so that you have some liquidity, and there are bond futures markets that take this even further.
Both stocks and bonds are called securities. Now, on to some investment terminology.
First, there's the rate of return. This is the percentage of the original purchase price you get as a return on the investment each year. For example, if you're holding a savings account getting 3% interest, and put $100 into it, at the end of one year, you get $103. Interest and return rates compound if you let them sit long enough – for example, if you let that $103 remain in the account, on the next year, it'd grow to $106.09 in the second year, assuming all other variables remained the same.
Second, there's volatility. Volatility is how rapidly a security changes price – highly volatile securities can change price (up or down) very rapidly. It's possible to make a lot of money doing high volatility securities trading, or day trading. It's also possible to lose a lot of money doing it. In general, stocks are more volatile than bonds in the US market.
In general, stocks are more volatile than bonds, and the things that will send stock prices plummeting will bring the prices of bonds up, so it's always worthwhile to have a mixture of both in your portfolio. Over the long haul, stocks perform well, and penny stocks (stocks of new companies just starting out, selling for under a dollar per share) can yield enormous returns on stock pricing, and can double, triple, or more in the course of days. As your investments move from wealth generation to wealth preservation, and income production, you'll want to shift your picks from highly volatile stocks to more secure bonds, particularly as you approach retirement.
So the question isn't "Which are better, stocks or bonds?" it's more a case of "What percentage do I allocate to each?"
About the Author
The Stock Market If you want to discover your pot of gold in the stock market, then you have to know it inside out. And for all the inside-out information on the stock market explained in simple, concise, layman terms, all you need to do is click on this link: Stock versus bonds
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