Question

Edmond and Tina are a young couple. They are planning to invest in MTR. Currently, MTR has shares and bonds outstanding in the market. Advise them the difference between MTR shares and bonds.

Answer 1

Stocks and bonds both belong to different finance asset classes.They both provide different benefits. SO depending on their capacity to take risk and their investment horizon and their investment objective Edmond and Tina can chose either MTR shares or Bonds. The following are the differences between Shares and Bonds

Differences are

1) Bonds are usually less risky than shares. Bonds are form of long term debt where the issuing company agrees to pay whole amount of principal at a specified maturity date.Bonds pay back the full amount of principal on maturity. Bonds also promise to pay fixed interest to bondholders. Bonds are sold over OTC(Over the Counter) market. Bonds are given rating by the rating agency like Standard and poor and Moody's. This rating tells how much risky is a bond in defaulting.A bond with AAA is of high quality.

2)Shares are traded on a stock exchanges. Purchasing stocks means we are buying small ownership stake in MTR company on the belief that it performs well and the value increases. Since Shares are at higher risk the rate of return is higher on shares than bonds. Individual stocks are in the riskier end of the investment spectrum and in terms of volatility.Stocks are therefore favoured by those who wishes to take short -term risk.

3)Stocks offer ownership rights to the investors. Whereas bonds are considered loan paid to the company.Bonds are debt to the company.

4)Bonds have a maturity period.The time to sell of the Shares is dependent on you, based on your return needs on investment.

5)Since shareholders are owners , they have ownership rights, the detail about the voting can be done through mail. Mail is received by the investors and the details about the voting requirement by the company would have been mentioned.

6)If the company incurs loss than the shareholders wont receive any dividend. Bond holders are required to be paid the interest irrespective of incurring financial loss.

7)When there is an event of liquidation stock holders have residual claim on the assets whereas the bond holders have highest priority.

8)A company may or may not pay dividend but there is a compulsion on the company's part to pay dividend.

9)Stockholders will have to pay Dividend Distribution tax(DDT)when they receive dividends whereas the bondholders are not exposed to such tax burdens.