In this quick guide, we will look at the main differences between stocks and bonds, helping you make an informed decision about which type of investment is best for your portfolio. The choice depends on your level of risk, investment time frame and financial goals.
What are stocks?
Shares represent the share of ownership in the company. By investing in shares, you become a co-owner and share the profits (or losses) of the company. This is a riskier but potentially more profitable option than bonds, as the increase in the value of shares can be significant, but the losses can also be significant. Dividends are another source of potential profit from shares.
What are bonds?
Bonds are a loan that you provide to the government or company. You receive a fixed interest income (coupon income) for the use of your funds, and upon the expiration of the bond term, the initial investment amount (nominal value) is returned to you. Bonds are considered less risky than stocks, but the yield is usually lower.
Risk level and profitability.
Risk and profitability are closely related. Stocks offer greater growth potential, but also a greater risk of capital loss. Bonds offer lower profitability, but also less risk. Diversifying your portfolio, including both stocks and bonds, can help reduce overall risk.
Time frame of investment.
If you have long-term investment goals (e.g. pension), stocks may be a more suitable option, as you have time to survive market fluctuations. For short-term purposes or a more conservative approach, bonds may be preferable.
There is no universal answer to the question of what is better – stocks or bonds. The optimal ratio depends on your individual situation. Before making a decision, consult a financial advisor to determine the strategy that best suits your needs and goals.