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If you have made the decision to invest, but you still don’t know what, in this we show you the characteristics of the differences between two common alternatives when it comes to investing and generating returns on your money: bonds and stocks. And although they can be confused by their similarities, today we teach you to identify those notorious differences and know them to make the best investment decision.
When you purchase a bond, you give your money to the entity that issued it, a private company or a local or national government, and the latter agrees to return it at an agreed time, and will additionally give you an extra percentage, which is interest and is the real profit for doing the operation.
From the point of view of the entity, the bond is a debt, for the investor it is a fixed-income instrument since he knows from the beginning that he is going to receive interest. That is why bonds are also known as “debt securities” because when it comes to investing, whoever invests acts as a bank; since, it lends money in order to collect interest and recover its investment at the end of the term.
There are many types of bonus, let’s review some below:
- Government-issued bonds: when money is lent to a government in exchange for an interest rate that is agreed upon.
- Savings Bond issued by companies: They are less safe than government bonds (although of course, the risk depends on the company and the country where they are issued) but they generate higher returns for investors and companies that issue them.
- Exchangeable bonds: They can be exchanged for already existing shares of the company.
- Convertible bonds: They can be exchanged for newly issued shares with a lower yield.
- Zero coupon bonds: Interest is not paid month by month, but the accumulated interest is paid at the time of maturity.
- Social bonds: Its objective is to finance projects with the aim of mitigating a specific social problem.
Where can I buy vouchers?
If this investment alternative suits your needs and times, take into account where you can buy them:
- Purchase of bonds in the primary market: in this type of market, the sale of bonds is done through auctions. There, the main buyers are banks and institutional investors, as well as some private investors.
- Purchase of bonds in the secondary market: Here the bonds that were acquired in the primary market are sold, facilitating their access to individual investors through a broker.
When you invest your money in the shares of a company, you immediately become a partner in it and obtain rights and obligations, no matter how many shares, no matter how small this number is, you will still be a partner and a piece of the company is yours.
However, when it comes to decision-making power, the number of shares you have will influence what they represent within the percentage of the company’s capital stock.
For the entity or company, the sale of shares represents an increase in net worth, since the new partner is contributing capital; for the investor, who bought a real piece of the company, it is a variable income instrument, that is, there is no contract or agreement to return the money, it all depends on the situation of the company.
That is, the owner shares the profits and losses of the company, he can receive the benefits if the organization performs well (the more shares, the greater the dividend to be received), or if this is deficient, the shares will go down and, therefore, the value of the investment will be lower, meaning a loss.
Similarities Between Bonds and Stocks
Both bonds and shares are instruments that exist within the capital market, for the investor they are a way to make their money useful, and for the issuer a way to obtain liquidity.
In both cases and before carrying out the operation, the person should ask themselves: How much money do they have, and of that amount, how much would they be willing to lose? What is the risk you want to take? What is the time you can wait? And how much do you want to earn?
What are the differences?
- The shares have a perpetual character, you will be the owner of them as long as you do not sell them. Instead, the bonds have an operation term that is agreed in the contract.
- Bonds return the full amount of the invested capital, the risk can be much lower than that of shares, where their price varies depending on the market value (it can exceed any profitability limit or leave none, since profitability is not guaranteed ).
- With the shares, he acquires certain rights, in some cases, having the possibility of voting, which the holders of the bonds do not get.
- Bonds can generate a steady stream of income while stocks, the potential for higher returns.
- Stocks can be hedged against inflation, an increase in this value can affect the actual payment for the bond. Generally speaking, the money invested in buying bonds can be higher than that of stocks.
What should you invest in?
The answer is simple, it depends on you and your investor profile. Bonds fit a conservative profile while stocks are for riskier people. If you are not in a hurry to obtain a return, on the contrary, you want it in the medium or long term, you could become a shareholder, but if you do not want to wait that long and want, at least, to have a certain date, the recommendation is to buy bonds.
It does not matter if your final decision is bonds or stocks or if you are getting advice to put together a portfolio that mixes both, it is always essential to know how financial assets work in their entirety, the company or entity in which you invest, before investing, short, medium and long-term prospects, to get the most out of your operation and avoid running out of investment and, incidentally, without savings.