There are many ways to invest. You can invest in gold, real estate, land holdings, and others. But these traditional methods are restrictive as investors need an already established financial buildup for them. As a new and aspiring investor, you can acquire a good position in the financial world of bonds, stocks, and other security holdings.
While the financial markets have many entities for you to learn, understand, and trade, the two primary entities are stocks and bonds. So let’s know what they are and how they can end in different results for your investments.
Bonds are a type of loan that the buyers of bonds provide to companies or governments issuing them. When you buy bonds, the company or the government pays you interest on the number of bonds you purchase for a predetermined period. The total amount of the bonds purchased is also paid at the end.
For example, If you buy a bond for Rs. 2,500 and get an annual interest rate of 2% over ten years, you will receive Rs. 50 in interest per annum, which will be evenly dispersed throughout the term of bonds. After ten years, you will earn Rs. 500 in interest and recover the original investment of Rs. 2,500.
Stocks are representative of partial ownership or equity in a company. When you buy stocks, you buy a small part of the business. You can start by buying as small as one stock and can acquire as per your investment goals. Shareholding is directly proportional to the ownership stake – the more shares you own, the more ownership you have.
Let’s say that a company’s stock costs Rs. 50 per share. You decide to invest Rs. 2,500, i.e. buy 50 stocks at Rs. 50 per unit. If the stock price reaches Rs. 75 per unit, it will indicate a 50% price increase. This will increase your investment increment by 50%, and your Rs. 2500 will become Rs. 3,750.
How does the difference affect you?
It is clear that owning shares gives you partial ownership of a business, and in buying bonds, you give a credit loan to the issuing corporation or government. The way these instruments make money is very different.
Shares are valued and sold on the stock market, and most bonds pay a fixed interest rate over time.
A bond usually has a fixed maturity or repayment period after which it matures. Stocks typically remain outstanding indefinitely. Equities provide a higher return than a bond but also have a greater risk. In general, bonds offer relatively reliable and lower returns.
The value of the shares is equal to the company’s value, and the resulting share price depends on the company’s market value. A bond, on the other hand, is a loan offered at a fixed interest rate. Ultimately, choosing an investment channel that best suits your goals depends on you, but you must select that channel based on an intelligent understanding and analysis.