Stocks v/s Bonds – A quick guide

When you start scouting for investment options in the financial markets, the most common instruments you will come across are stocks and bonds. Both of these are means to raise funds by organizations. They both have multiple attractive features. But, in terms of their fundamentals, they are as distinct as chalk and cheese. This article will give you an overview of these investment products and spell out their differences to help you with your investment decisions.

What are Stocks?

Stocks are equity-based instruments. When you invest in a company's stock, you become a part-owner of that company in proportion to your shareholding in that company. In other words, you purchase a stake in that company through your stock investment. If the company makes a profit, you may enjoy capital appreciation via the increase in the stock price or dividend income. Whereas, if the company suffers losses, your invested capital may also reduce. It makes the income from stocks uncertain to an extent. Hence, stocks are relatively risky. But, investments in stocks have the potential to give you somewhat higher returns if you invest in well-performing stocks and invest for the long term. You can purchase stocks through an IPO (Initial Public Offering) or from a stock exchange. You need to open a trading account and demat account to invest in stocks.

What are the various types of Stocks?

Stocks are classified into various categories. Check out:

• Common stocks – Common stocks are general shares that are actively traded in the stock market. When you invest in a common stock it represents ownership and allows you to claim a portion of the company’s profits in the form of dividends. Common stocks carry voting rights.

• Preferred stocks – Preferred stocks represent a certain degree of the company’s ownership. Unlike common stock investments, you receive fixed dividend earnings. You are given preference over common stock investors at the time of liquidation. However, preference shares do not carry voting rights.

Generally, stocks are also classified as Value stocks, Growth stocks, Defensive stocks, Income stocks, Blue-chip stocks, and Penny stocks.

What are Bonds?

Bonds are debt instruments. When you invest in a bond of an organization, you are lending money to that organization for a stipulated period. In return, the organization will pay you interest for using your funds. It is your income from the bond investment. The interest rate at which you invest in the bond is also known as the coupon rate. Since the coupon rate and maturity period are pre-decided at the investment time, you are assured of receiving a certain income. It makes bonds relatively safe. You can trade most of the bonds like shares in the stock markets too. You will receive your principal investment amount at the time of maturity in addition to the regular pay-outs of interest income. Bonds receive a credit rating from authorized agencies depending on their debt repayment capacity. You must be sure to pick highly-rated bonds as these bonds have less chance of a default. If the issuing company defaults, you may lose out on your interest income and suffer losses on your principal amount.

What are the various types of Bonds?

Bonds can be classified into various types based on their issuer and applicable coupon rate. Following is a mention of the most popular types of bonds to invest in:

• Government Bonds – As the name suggests, these bonds are issued by the Government. Both the central and the state governments issue them. There are multiple variants of the bond like Fixed rate Bonds, Floating rate Bonds, Sovereign Gold Bonds, Inflation-Indexed Bonds, GOI Savings Bonds, Zero-Coupon Bonds, etc.

• Municipality Bonds – Various municipal corporations and other associated bodies issue these bonds. They typically have a maturity period of three years and earn you reasonable interest payments. General Obligations Bonds and Revenue Bonds are two types of Municipality Bonds you can invest in.

• Corporate Bonds – Corporate Bonds are the most popular type of bonds. Almost all leading corporate companies issue them. The company’s credit rating is a key decider for investment. It is advisable to always invest in the bonds of a company having a high credit rating.

Stocks v/s Bonds

The table below will give you a snapshot of the characteristics and the differences between stock and bonds.

Additional Read: What is Demat Account, its Meaning, Type, and Process

Investing in Stocks and Bonds

There is a single point of contact for investing in stocks and bonds – a demat and trading Account. Having a demat Account is a prerequisite for most of the capital market investment. If you do not have a Demat Account, do not worry. You can open one in minutes online. All you need is a well-known, full-service registered broker who will not only open a trading and demat account for you but also help you with several value-based, add-on services like investment advisory, research, etc. You can quickly open a demat and trading account online with ICICI Direct.

Additional Read: Which Demat Account is best

Conclusion

Stocks and bonds both weigh differently to different investors. A good idea is to include both these instruments in your portfolio to diversify it for optimum and secure returns. You can decide the proportion of each of these instruments in your portfolio depending on your risk appetite, investment goals, and investment time horizon.