Question

Suppose you get a $2,000 holiday bonus at the end of the year. Should you invest in stocks, bonds, or put your money in the bank as savings? Explain all factors affecting your decision.

Answer 1

Bonds are debts while stocks are stakes of ownership in a company. Because of the nature of the stock market, stocks are often riskier short term, given the amount of money the investor could lose virtually overnight. However, long term, stocks have historically proved to be very valuable.

On the other hand, bonds often operate off of fixed interest rates that the entity buys from the investor, which will frequently pay out annual interest rates to investors while repaying the amount in full at a given time. For this reason, bonds are generally considered a safer investment in the short term or for new investors.

The biggest pro of investing in stocks over bonds is that, history shows, stocks tend to earn more than bonds - especially long term. Additionally, stocks can offer better returns if the company growth is exponential, earning the investor potentially millions on an originally miniscule investment. For investors willing to take the risk, stocks can pay more than bonds in returns as the company's stock could continue rising. As a con, stocks make no promises of future returns on initial investments. Because the stock market is unpredictable, it is very easy to lose money by investing in the wrong stocks. For this reason, stocks are often considered higher risk than bonds.

In contrast with stocks, as a pro, bonds are often lower risk due to how they have fixed coupon (or interest) rates on their loans.Additionally, fixed-rate bonds can be resilient to changes in interest rate fluctuations in the economy, making them a desirable asset to own in uncertain times. However, as a con, bonds don't have as much income potential as stocks - the latter of which can multiply in value overnight

So if you are a person who is ready to take risk the best investment option is Stock, however if one does not want to take risk Bonds are a good option.

The safest here would be to divide half the amount in Stock and the other half in Bonds.

One should avoid keeping money in Savings as it would not yield any income. However in case if there would be any needs that will arise in future and one knows about it, you can utilise some of the amount kept aside for investing in bonds and then put it in the bank as savings.