Stocks in their simplest form represent part ownership in a company. For example if you own 100 shares in a company that has 1000 shares, you will own 10% of the company. Companies have realized that it is cheaper to raise funds for their activities by offering part ownership in their companies.
Bonds on the other hand are a loan that you give to a company. The company or government will pay you interest for using your money for their activities.
For example, if you bought a bond for 200 pounds with an interest rate of 5% over 5 years. The company owes you the interest plus the 200 pounds.
When deciding whether to invest in shares in a company or bonds, you should note that bond returns are fixed while the returns on shares can fluctuate and are not guaranteed. You should also note that in case a company winds down or is bankrupt, the bondholders are paid first and the shareholders last.
A good investment portfolio contains both stocks and bonds. If you are investor only interested in short term returns, then you should have more bonds than stocks in your investment portfolio. Bonds will provide you with a consistent income and in cases of market fluctuations, they offer a great cushion.
As a rule of thumb, the younger you are, the more you should invest in stocks than bonds in your investment portfolio. Most investment managers recommend 70% stocks and 30% in bonds for anyone under 30 years. The older you get, the lower the percentage of stocks you should hold, as you are more interested in income than growth in your portfolio. Discuss these issues with your investment advisor and you are likely to do very well in the stock market.
However, if you are planning on investing your funds for longer than 10 years, then your investment portfolio should have more stocks as companies will tend to increase in value in the long term.
Related Posts