12 Stocks and Bonds Differences

stocks and bonds

There are still many people, especially beginners, who don't know what the difference between stocks and bonds is. Although both are included in investment instruments in the capital market, the two instruments are different.

Therefore, this time omdody.com wants to provide a complete review of the differences between stocks and bonds, especially for those of you who are new or about to invest.

The goal is so that you can generate maximum profits. Besides, it is also following your investment goals.

The reason is, one of the keys to successful investing is the selection of investment instruments following the objectives. For that, you need to choose the right type of investment instrument. 

No need to linger, let's just look at the differences in stocks and bonds below.

The difference between stocks and bonds

In general, stocks and bonds have almost the same purpose, namely as a means of obtaining capital or funds for the benefit of the company.

However, the difference between stocks and bonds is that when companies issue shares, it means that they sell part of their ownership to another party.

Well, the difference with bonds is that when a company issues bonds, it means they issue debt securities that can be purchased.

You who have bonds are entitled to a payment of the principal debt plus interest.
So, shares are a form of ownership of a company and the owner of the shares is entitled to benefit from the company or what is often referred to as dividends.

Meanwhile, bonds are debt securities issued by companies or government agencies as a form of borrowing money which will then be paid back at the principal price of debt and interest, or the term is called a coupon.

Equation of stocks and bonds

As explained above, stocks and bonds are very profitable investment instruments and can generate many benefits. Here are three equations:

1. Has claims on profits and assets 

Owners of stocks and bonds have a claim on profits and assets. This is because these two investment instruments promise their owners an income in the form of assets, namely money and other assets.

Well, the claim occurs on the transaction date or at the time of buying shares and signing the bonds which can then be executed at maturity.

So, in essence, stocks and bonds promise income for their owners.

2. Has the right to redeem

Owners of stocks and bonds also have the right to redeem, which is the option to exchange stocks and bonds for money.

3. Valuable letters

Another similarity between stocks and bonds is that they are securities. So, both are a form of black on the white agreement which is an agreement and has been agreed by both parties.

So, these securities can be bought and sold on the stock exchange and the capital market.

Types of stocks and bonds

Before plunging into allocating funds to one of these investment instruments, there are several types of stocks and bonds that you need to know, such as:

Stock type:

  • Common shares have a claim on the income and assets of the company. However, the liabilities are also limited, which means that when the company goes bankrupt, the loss borne by shareholders is as large as the investment.
  • Preferred stock has the characteristics of both common stock and bonds. So, the income earned is dividends whose rates are fixed like bond interest. The owners of preferred stock will get the main right of dividends when the company is liquidated.

Bond type:

  • Secured bonds, which are types of bonds that are guaranteed with certain guarantees. These types of bonds are in the form of guaranteed bonds, mortgage bonds, collateral bonds, and equipment bonds.
  • Unsecured bonds, which form bonds that are given only in the form of mere belief, such as debenture bonds, ie bonds issued by governments and subordinate bonds.

What happens when the company goes bankrupt?

In addition to the different sources of profit, some bonds and stocks stand out the most, namely when the company goes bankrupt.

Stock investors will be the last ones to get funds back when the company goes bankrupt.

Meanwhile, bondholders will be the first to get rights when the company goes bankrupt.

So, when the bond owners have got their rights, then the remaining money is distributed to shareholders.

Even in the worst of circumstances, the shareholders can get nothing when the company goes bankrupt.

Which is better, investing in stocks or bonds?

How? Now you know the difference between stocks and bonds, right? Although both can provide many benefits, the two instruments have quite striking differences.

Next, which type of investment should you choose, stocks or bonds?

If you ask like that, the answer is back to your risk profile. What does it mean? Yes, so you need to know how much risk you are willing to take.

If you are in the category that is ready to take high risks, aka aggressive investors, investing in stocks can be the best choice, especially if you are young. 

This is because shares are a long-term investment. So, you can enjoy the maximum yield over 10 years.

Meanwhile, if you are a conservative investor, aka you can't bear high risks, invest in bonds.

Besides being safe, bonds are also the right choice for those of you who are starting to enter retirement.

That was a complete review of the differences in stocks and bonds that you can consider when collecting money from investing. 

Well, as additional information, you can know to merge with investment and insurance benefits. 

This benefit is also known as unit-linked insurance. But remember, whatever the investment option is, make sure it suits your goals.

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