If you have made the decision to invest but you still don’t know what to invest in, in Saber más Ser más we show you the differences between two common alternatives when it comes to investing and generating returns on your money: bonds and stocks. Today we teach you to recognize those notorious differences to make the finest investing option.
When you purchase a bond, you give your money to the entity that issued it, a private company or a local or national government, and the latter agrees to return it at an agreed time and will additionally give you an extra percentage, which is interest and is the real profit for 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 since he knows from the beginning that he is going to receive interest. Bonds are “debt securities” because investors lend money to earn interest and get their money back.
There are many types of bonuses; let’s review some below:
1. Bonus TypesGovernment-issued bonds: lending money to a government for an agreed-upon interest rate.Company bonds: They’re riskier than government bonds, but they pay more.
2. Exchangeable bonds: Company shares can be exchanged for them.
3. Convertible bonds: Exchangeable for lower-yielding shares.
5. Zero-coupon bonds: Interest is accumulated and paid at maturity.
6. Social bonds: They fund social projects.
Where can I buy vouchers?
If this investment alternative suits your needs and times, take into account where you can buy them:
- Purchase of bonds in the primary market: in this type of market, the sale of bonds is done through auctions. There, the main buyers are banks and institutional investors, as well as some private investors.
- The secondary market sells primary market bonds to private investors through a broker.
When you buy company shares, you become a partner with rights and responsibilities. You are a partner and own a portion of the company regardless of the number of shares.
However, when it comes to decision-making power, the number of shares you have will influence what they represent within the percentage of the company’s capital stock.
Since the new partner is contributing capital, the sale of shares increases the entity or company’s net worth.Since there is no contract to refund the money, the investor who bought a real portion of the company has a variable income instrument.
That is, if the owner shares the company’s profits and losses, he can benefit if the company performs well (the more shares, the higher the dividend), but if it doesn’t, the shares will fall, lowering the investment’s value.
Similarities Between Bonds and Stocks
Both bonds and shares are instruments that exist within the capital market; for the investor, they are a way to make their money useful, and for the issuer, they are a way to obtain liquidity.
In both cases, and before carrying out the operation, the person should ask themselves: How much money do they have, and of that amount, how much would they be willing to lose? What is the risk he wants to take? How long can he wait? And how much does he want to earn?
What are the differences?
- The shares have a perpetual character; you will be the owner of them as long as you do not sell them. Instead, the bonds have an operating term that is agreed upon in the contract.
- Bonds repay the full amount of cash invested, thus the risk is significantly lower than that of shares, which vary based on market value and can surpass any profitability limit or leave none.
- With the shares, he acquires certain rights, including, in some cases, the possibility of voting, which the holders of the bonds do not get.
- Bonds can generate a steady stream of income, while stocks have the potential for higher returns.
- Stocks can be hedged against inflation; an increase in their value can affect the actual payment for the bond. Generally speaking, the money invested in buying bonds can be higher than that invested in stocks.
What should you invest in?
The answer is simple: it depends on you and your investor profile. Stocks are risky, bonds are prudent.If you want a quick return, buy bonds; otherwise, become a shareholder.
To maximize your operation and avoid running out of investment and savings, you must understand financial assets and the firm you invest in before investing in short-, medium-, and long-term prospects.