Question

What is a bond? Is it better that stocks?

Answer 1

Bond is a debt instrument issued by a company. The company issues bond to raise some fund from the market as a borrowing and also pay a fixed amount (interest) to the bond holder every year until the maturity. On maturity the bond holder is paid back his amount. Suppose a company issued certain bond with par value of $100 and promised to give interest 2% each year. So, the company will pay $2 each year to the bondholder until maturity. And on maturity the bond holder will be paid back his $100. Return or the interest on bond is called equilty as it gives a fixed amount of interest every year until maturity. Price of bond is less volatile.

Buying stock, on the otherhand, implies that the stock holder has bought a share of the company. The investor gets the ownership of the company (though very minimum). The investor get divident as return. That means a part of the profit of the company. If say the investor has bought a share of 5% of a company, then the investor will get 5% of profit share of the company. Also the investor gets the voting right. Price of share (stock) is volatile and does not ensures that you will get a fixed return each year. It may lead to a capital loss too.

Now the question comes, which is better?

The answer is that for someone who's primary interest is earning a fixed income, the bond is good for him. But, in reality a good investor always diversify his fund in both bond and stock to maximise his earning or reduce the risks. Anyone who just want to have a fixed income should go for bond. Also, a good investor always make profit by buying the stock when it's price are less and sell them when the price increses.

It's upto the investor what kind of return he wants. For a risk averter bod is better option as it gives a fixed yearly income.

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