Question

Should individuals invest in bonds or stocks? Explain in detail all of the factors one should consider when making an investment choice between stocks and bonds.

Answer 1

REASONS WHY STOCKS IS A BETTER OPTION :

A) As shares represent ownership in a company, you are entitled to your share of profits (which are paid in form of dividends). Higher the profits higher your dividend.

B) As a stockholder of a company you are directly benifited from its growth and expansion.

C) As stocks carry higher risk, the returns are comparatively higher than those of bonds.

D) As a owner of a company, which you are if you are its equity shareholder, you get to vote in its management decisions.

REASONS WHY BONDS ARE ALSO BETTER OPTION :

A) It is a instrument of debt security. The person who borrows the money promises to pay the principal along with interest at predetermined fixed intervals to person holding the bond.

B) You are bound to receive your interest in time irrespective of company's performance. Company must pay its debt commitments even in case of low/no profits. As a bond holder, you are guaranteed to receive your interest on time.

C) In case of winding up of a company, debt holders are preferred over stockholders for repayment.

The key to better investment planning is finding the right combination of both Stocks and Bonds.. Liquidity, Risk-Return relationship inflation rate play a vital role in choosing the best combination  

FACTORS TO BE CONSIDERED WHEN MAKING AN INVESTMENT DECISION :

1. Risk-Return relationship : Stocks generate higher returns when markets are bullish and they crash when bear dominates. Here the risk is higher, so are the returns. In case of bonds, you receive your promised interest however the market may perform. Bonds are of lower risk, so are its returns.

2. When a company files bankruptcy : The dues are cleared first for the bond holders and creditors. So, the debt holders are in safe court compared to stockholders when a company is wound up.

3. Stocks carry risk of Capital Loss whereas bonds are safe bet

4. Stocks beat inflation whereas returns from bonds are tend to be affected by the prelavent inflation rates.

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