Hi, our favourite new investors.
Today, we will continue to explore the instruments within the financial industry that will hopefully lead us all down the road to success in money-making. For all the new investors, this article will enable you to understand some features of the financial jungle and hopefully to guide you in your future investment choices. If you have any questions, don’t hesitate to contact our team.
When it comes to investing, one of the first dilemmas you will encounter is, as aforementioned, what financial instrument you will want to invest in. In this article, we will deal with the two of the main and conventional investments options, which are stocks and bonds.
Firstly, let’s define together what is a stock and what is a bond and mostly what can be your profit.
A stock is a part of a share capital of the company that you have chosen. The amount that you invest will define the percentage that you own on the share capital. So, when you invest in a company, you will own a percentage of the company’s assets, materials, buildings,
future earnings etc.
A bond is quite different from a stock. It is an instrument of debt, a loan called face value that you make to a company for a precise duration. In exchange of this loan, you will receive interests called bond coupon every year. At the maturity of the bond, your face value will be returned.
Remark: There are two kinds of bonds: those which are released by the government and those by the companies (A corporate bond). The government’s ones are less risky but their interest rates are lower, whereas a corporate bond are riskier but you can earn more money. This is typically the case however, the country and company whose instruments you will be after will have a credit rating from one of the big corporate banks (these can be the S&P rating, Fitch ratings & Moody’s where more can be found through a quick search through a search engine.) These credit ratings determine how likely the company is to default on the payments of the bond, thus the supposedly safer the institutions bond you will be buying, the lower percentage on the coupon payments.
Pros and Cons.
Now let’s see briefly what are the advantages and risks of each investment.
A stock can ensure you a bigger profit than a bond. Yet, you can earn more money but you can also lose more. In fact, a stock depends on the general (economic, geopolitical...) but also specific (linked to the company…) risks which are difficult to evaluate. A bond is more stable and predictable, you know how much you will earn each year and how much the company will give you back. Yet, bonds are not risk-free. Your earnings depend on the company’s pay-back capacity. Higher will be the interest rate of your bond, higher will be the risk.
Which one is better?
The answer is neither. In fact, it depends on what you are looking for. The real question should be which one is the more suitable for you. Self-discipline and awareness of you investing interests will go a long way in justifying your reasoning for purchasing a financial instrument.
An investor with a long-term goal such as a young person should invest more of stocks whereas an older person wanting to retire earlier and not losing money for example should prefer bonds which are safer. There are different strategies when it comes to investing, it depends on your goals. Let’s see
Above are different kind of strategies with an average profit percentage (remember to always factor in your commissions) that you can expect. The first strategy is very aggressive and not very suitable for beginners because it is a risky one, so a basic knowledge is necessary in order not to lose your capital.
It is therefore important for investors to have both stocks and bonds to create a diversified portfolio. In fact, it ensures you a security. Bonds and stocks move oppositely.
For example, when investors buy bonds instead of stocks, stocks price go down and vice versa. That’s why a loss of one of your investment can be covered by the gain of the other one.
The strategy that you will adopt will depend on the profits you want to make but also and mostly the risk you want to take.
Bonds and Stocks have both their advantages and their risks. Spreading the investments among bonds and stocks is the more common strategy. If you are still hesitating, don’t hesitate to contact the
HNFC team. We will try to advise you on the best strategy to adopt according to your situation.
Thank you for your time.
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Written by Louiz Domoustchieva │Independent stock analyst
Edited by Graham Laxton & Vee Venski
This article is not a promotion of financial investment. Investing money in financial instruments is risk-reward process. Losses and gains are part of financial investment process. Only invest money you can afford to lose.