Invest in bonds or shares?

Many beginner investors always start asking this question and it is good to know the difference. Bonds and shares are quite different when compared by their risk, returns and payouts.

What are bonds?

Bonds are a form of debt, where the owner of the bond is the lender. A bond is a contractual loan that is made between institutions and investors. In return for the financing though the bond, the institution pays a premium for the borrowing. This is premium is known as a coupon.

When the bond matures, the bonds face value is returned to investors. This payback and coupon payments can only occur if the borrowing institution has sufficient cash flow.

What are shares?

Shares (or stock) signifies ownership of a company and are brought on share markets (or stock exchange). They allow investors to profit from the companies growth and revenue. As a company performs well and profit increases, the share price of a company rises, increasing the value of an investors holdings. There are no promises or guarantees on the return of the initial amount of investment.

Are bonds or shares better?

This depends on the amount of risk and the rate of returns you are expecting.

Shares have:

• Higher returns

• Higher risk

• No guaranteed return

• Part company ownership

• Unlimited return from rising share price

Bonds have:

• Lower returns

• Less risk

• Periodic Payment structure

• Set time frame

• Set rate of return

• Company guarantees return

Although shares have a higher risk, most investors find a combination of shares and bonds to be a good bet. This allows investors to diversify their investments, giving some safety through bonds while leaving the opportunity open for higher returns from shares.

Tags: Bonds, Sharemarket, Shares, Stock, Stock Exchange

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